U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16 UNDER

THE SECURITIES EXCHANGE ACT OF 1934

 

For the month of March 2020

 

Commission File Number: 001-34409

 

RECON TECHNOLOGY, LTD

 

Room 1902, Building C, King Long International Mansion

No. 9 Fulin Road

Beijing, 100107

People’s Republic of China

(Address of principal executive offices)

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

 

Form 20-F   x Form 40-F  ¨

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ¨

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ¨

 

 

 

 

 

 

Explanatory Note:

 

The Registrant is filing this Report on Form 6-K to report its financial results for the six months ended December 31, 2019 and to discuss its recent corporate developments.

 

Attached as exhibits to this Report on Form 6-K are:

 

(1) the unaudited condensed interim consolidated financial statements and related notes as Exhibit 99.1;

 

(2) Management’s Discussion and Analysis of Financial Condition and Results of Operations as Exhibit 99.2;

 

(3) the press release dated March 18, 2020 titled “Recon Technology Reports Financial Results for the First Six Months of Fiscal Year 2020” as Exhibit 99.3;

 

(4) Supplemental Agreement No. 3 to the Investment Agreement with respect to Future Gas Station (Beijing) Technology Co., Ltd. dated March 17, 2020 as Exhibit 99.4; and

 

(5) Interactive Data File disclosure as Exhibit 101 in accordance with Rule 405 of Regulation S-T.

 

This report on Form 6-K is hereby incorporated by reference into the Company’s (i) Registration Statement on Form F-3 (file No. 333-234660) filed with SEC on November 13, 2019 and declared effective on November 26, 2019 and (ii) Registration Statement on Form S-8 (file No. 333-228918) filed with SEC on December 20, 2018 and the reoffer prospectus, dated December 20, 2018, contained therein.

 

 

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Statements in this annual report with respect to the Company’s current plans, estimates, strategies and beliefs and other statements that are not historical facts are forward-looking statements about the future performance of the Company. Forward-looking statements include, but are not limited to, those statements using words such as “believe,” “expect,” “plans,” “strategy,” “prospects,” “forecast,” “estimate,” “project,” “anticipate,” “aim,” “intend,” “seek,” “may,” “might,” “could” or “should,” and words of similar meaning in connection with a discussion of future operations, financial performance, events or conditions. From time to time, oral or written forward-looking statements may also be included in other materials released to the public. These statements are based on management’s assumptions, judgments and beliefs in light of the information currently available to it. The Company cautions investors that a number of important risks and uncertainties could cause actual results to differ materially from those discussed in the forward-looking statements, including but not limited to, product and service demand and acceptance, changes in technology, economic conditions, the impact of competition and pricing, government regulation, and other risks contained in reports filed by the company with the Securities and Exchange Commission. Therefore, investors should not place undue reliance on such forward-looking statements. Actual results may differ significantly from those set forth in the forward-looking statements. 

 

All such forward-looking statements, whether written or oral, and whether made by or on behalf of the company, are expressly qualified by the cautionary statements and any other cautionary statements which may accompany the forward-looking statements. In addition, the company disclaims any obligation to update any forward-looking statements to reflect events or circumstances after the date hereof.

 

 

 

 

 

 

 

Exhibit Index: 

 

99.1 Unaudited Consolidated Financial Statements and Related Notes for the Six Months Ended December 31, 2019 and 2018.

 

99.2 Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

99.3 Press release dated March 18, 2020 titled “Recon Technology Reports Financial Results for the First Six Months of Fiscal Year 2020”

 

99.4Supplemental Agreement No. 3 to the Investment Agreement with respect to Future Gas Station (Beijing) Technology Co., Ltd. dated March 17, 2020

 

101.INS XBRL Instance Document.
101.SCH XBRL Taxonomy Extension Schema Document.
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB XBRL Taxonomy Extension Labels Linkbase Document.
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.

 

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  RECON TECHNOLOGY, LTD  
     
March 18, 2020 By: /s/ Shenping Yin  
    Shenping Yin  
    Chief Executive Officer  
    (Principal Executive Officer) and  
    Duly Authorized Officer  

 

 

 

 

 

 

 

 

Exhibit 99.1

 

 

RECON TECHNOLOGY, LTD

 

  PAGE
   
INDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  
   
Unaudited Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2019 F-2
   
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the six months ended December 31, 2018 and 2019 F-3
   
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the six months ended December 31, 2018 and 2019 F-4
   
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2018 and 2019 F-5
   
Notes to the Unaudited Condensed Consolidated Financial Statements F-6

 

 

RECON TECHNOLOGY, LTD

CONDENSED BALANCE SHEETS

(UNAUDITED)

 

   As of June 30   As of December 31   As of December 31 
   2019   2019   2019 
   RMB   RMB   U.S. Dollars 
ASSETS               
Current assets               
Cash  ¥4,521,325   ¥10,325,219   $1,481,806 
Notes receivable   3,073,680    4,060,506    582,736 
Trade accounts receivable, net   68,535,282    63,063,443    9,050,441 
Trade accounts receivable- related party, net   3,409,912    3,409,912    489,368 
Inventories, net   1,270,523    1,796,411    257,809 
Other receivables, net   5,665,593    4,784,811    686,684 
Loans to third parties   4,960,000    -    - 
Purchase advances, net   1,343,576    187,174    26,862 
Contract assets, net   4,633,940    14,604,897    2,095,996 
Prepaid expenses   192,837    75,920    10,896 
Prepaid expenses - related parties   217,600    -    - 
Total current assets   97,824,268    102,308,293    14,682,598 
                
Property and equipment, net   3,661,321    3,267,226    468,890 
Construction in progress   21,524,994    23,143,654    3,321,421 
Land use right, net   1,307,887    1,294,267    185,744 
Investment in unconsolidated entity   31,078,971    31,220,259    4,480,521 
Long-term other receivables, net   440,015    23,922    3,433 
Prepayments for construction in progress   1,144,098    1,059,404    152,039 
Right of use assets   -    532,491    76,420 
Total Assets  ¥156,981,554   ¥162,849,516   $23,371,066 
                
LIABILITIES AND STOCKHOLDERS’ EQUITY               
                
Current liabilities               
Short-term bank loan  ¥2,500,000   ¥2,500,000   $358,783 
Trade accounts payable   14,089,293    14,688,353    2,107,972 
Other payables   2,246,410    2,086,665    299,464 
Other payable- related parties   2,290,873    4,081,028    585,682 
Advance from customers   120,000    2,024,753    290,579 
Accrued payroll and employees' welfare   1,384,529    2,885,935    414,170 
Investment payable   6,400,000    6,400,000    918,485 
Taxes payable   2,180,847    2,831,702    406,387 
Short-term borrowings   1,081,096    -    - 
Short-term borrowings - related parties   9,010,525    11,931,310    1,712,301 
Long-term borrowings - related party - current portion   780,797    813,334    116,724 
Operating lease liabilities - current   -    640,491    91,919 
Total Current Liabilities   42,084,370    50,883,571    7,302,466 
                
Long-term borrowings - related party   8,196,204    7,796,782    1,118,942 
Total Liabilities   50,280,574    58,680,353    8,421,408 
                
Commitments and Contingencies               
                
Equity               
Common stock, ($ 0.0925 U.S. dollar par value, 20,000,000 shares authorized; 4,611,720 shares and 4,361,634 shares issued and outstanding as of December 31, 2019 and June 30, 2019, respectively)*   2,712,773    2,876,228    412,777 
Additional paid-in capital   250,624,798    254,552,363    36,531,641 
Statutory reserve   4,148,929    4,509,040    647,107 
Accumulated deficit   (164,780,885)   (171,842,193)   (24,661,634)
Accumulated other comprehensive gain   2,909,936    2,919,546    418,994 
Total stockholders’ equity   95,615,551    93,014,984    13,348,885 
Non-controlling interests   11,085,429    11,154,179    1,600,773 
Total equity   106,700,980    104,169,163    14,949,658 
Total Liabilities and Equity  ¥156,981,554   ¥162,849,516   $23,371,066 

 

* Retrospectively restated for effect of stock split on December 27, 2019

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

 F-2 

 

RECON TECHNOLOGY, LTD

CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)

 

   For the six months ended
December 31,
 
   2018   2019   2019 
   RMB   RMB   USD 
Revenues               
Revenues - third party  ¥41,954,746   ¥30,405,153   $4,363,543 
Revenues - related party   316,983    -    - 
Revenues   42,271,729    30,405,153    4,363,543 
                
Cost of revenues               
Cost of revenues and related tax - third party   26,914,495    18,437,241    2,645,989 
Cost of revenues and related tax - related party   120,142    -    - 
Cost of revenues and related tax   27,034,637    18,437,241    2,645,989 
                
Gross profit   15,237,092    11,967,912    1,717,554 
                
Selling and distribution expenses   4,909,361    2,660,873    381,871 
General and administrative expenses   18,903,138    13,366,413    1,918,258 
Provision for (net recovery of) doubtful accounts   (1,494,707)   25,537    3,665 
Research and development expenses   1,654,702    2,895,286    415,512 
Operating expenses   23,972,494    18,948,109    2,719,306 
                
Loss from operations   (8,735,402)   (6,980,197)   (1,001,752)
                
Other income (expenses)               
Subsidy income   55,706    854,389    122,616 
Interest income   32,109    85,745    12,306 
Interest expense   (856,571)   (761,322)   (109,260)
Income (loss) from investment in unconsolidated entity   (844,369)   141,288    20,277 
Foreign exchange transaction gain   17,651    209    30 
Other income (expense)   387,439    (60,760)   (8,720)
Other income (expense), net   (1,208,035)   259,549    37,249 
Loss before income tax   (9,943,437)   (6,720,648)   (964,503)
Income tax expenses   2,002    316,799    45,465 
Net loss   (9,945,439)   (7,037,447)   (1,009,968)
                
Less: Net income (loss) attributable to non-controlling interests   138,804    (336,250)   (48,256)
Net loss attributable to Recon Technology, Ltd  ¥(10,084,243)  ¥(6,701,197)  $(961,712)
                
Comprehensive loss               
Net loss   (9,945,439)   (7,037,447)   (1,009,968)
Foreign currency translation adjustment   1,195,328    9,610    1,379 
Comprehensive loss   (8,750,111)   (7,027,837)   (1,008,589)
Less: Comprehensive income (loss) attributable to non-controlling interests   138,804    (336,250)   (48,256)
Comprehensive loss attributable to Recon Technology, Ltd  ¥(8,888,915)  ¥(6,691,587)  $(960,333)
                
Loss per common share - basic and diluted  ¥(2.72)  ¥(1.51)  $(0.22)
Weighted - average shares -basic and diluted*   3,711,083    4,449,980    4,449,980 

 

* Retrospectively restated for effect of stock split on December 27, 2019

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 F-3 

 

 

RECON TECHNOLOGY, LTD

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

   Common Stock   Additional
Paid-in Capital
   Statutory
Reserve
   Accumulated
deficit
   Accumulated
Other
Comprehensive
income (loss)
   Stockholders'
 Equity
   Non-controlling
Interest
   Total
 Equity
   Total
 Equity
 
   Number of
Shares*
   Amount
(RMB)
   (RMB)   (RMB)   (RMB)   (RMB)   (RMB)   (RMB)   (RMB)   (USD) 
Balance, June 30, 2018   3,677,843   ¥2,279,510   ¥207,490,280   ¥4,148,929   ¥(139,424,980)  ¥1,516,093   ¥76,009,832   ¥10,861,930   ¥86,871,762   $12,467,249 
Capital contribution in non-controlling interests   -    -    -    -    -    -    -    300,000    300,000    43,054 
Restricted shares issued for services   25,000    15,901    500,293    -    -    -    516,194    -    516,194    74,081 
Issuance of common stock in exchange of shares of FGS, net of issuance costs   487,057    307,981    21,125,815    -    -    -    21,433,796    -    21,433,796    3,076,034 
Restricted shares issued for management and employees   -    -    9,539,917    -    -    -    9,539,917    -    9,539,917    1,369,105 
Net loss (income) for the year   -    -    -    -    (10,084,243)   -    (10,084,243)   138,804    (9,945,439)   (1,427,302)
Foreign currency translation adjustment   -    -    -    -    -    1,195,328    1,195,328    -    1,195,328    171,545 
Balance, December 31, 2018   4,189,900   ¥2,603,392   ¥238,656,305   ¥4,148,929   ¥(149,509,223)  ¥2,711,421   ¥98,610,824   ¥11,300,734   ¥109,911,558   $15,773,766 
Balance, June 30, 2019   4,361,634   ¥2,712,773   ¥250,624,798   ¥4,148,929   ¥(164,780,885)  ¥2,909,936   ¥95,615,551   ¥11,085,429   ¥106,700,980   $15,313,008 
Capital contribution in non-controlling interests   -    -    -    -    -    -    -    405,000    405,000    58,123 
Restricted shares issued for services   -    -    33,927    -    -    -    33,927    -    33,927    4,869 
Restricted shares issued for management and employees   250,086    163,455    3,893,638    -    -    -    4,057,093    -    4,057,093    582,247 
Net loss for the year   -    -    -    -    (6,701,197)   -    (6,701,197)   (336,250)   (7,037,447)   (1,009,968)
Appropriation of statutory reserves   -    -    -    360,111    (360,111)   -    -    -    -    - 
Foreign currency translation adjustment   -    -    -    -    -    9,610    9,610    -    9,610    1,379 
Balance, December 31, 2019   4,611,720   ¥2,876,228   ¥254,552,363   ¥4,509,040   ¥(171,842,193)  ¥2,919,546   ¥93,014,984   ¥11,154,179   ¥104,169,163   $14,949,658 

 

* Retrospectively restated for effect of stock split on December 27, 2019

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

 F-4 

 

RECON TECHNOLOGY, LTD

CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   For the six months ended December 31, 
   2018   2019   2019 
   RMB   RMB   U.S. Dollars 
Cash flows from operating activities:               
Net loss  ¥(9,945,439)  ¥(7,037,447)  $(1,009,968)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:               
Depreciation and amortization   515,457    411,592    59,069 
Loss from disposal of equipment   -    3,189    458 
Provision for (net recovery of) doubtful accounts   (1,494,707)   25,537    3,665 
Provision for slow moving inventories   65,380    25,312    3,633 
Amortization of right of use assets   -    718,000    103,043 
Restricted shares issued for management and employees   9,539,917    4,057,093    582,247 
Loss (income) from investment in unconsolidated entity   844,369    (141,288)   (20,277)
Restricted shares issued for services   516,194    33,927    4,869 
Changes in operating assets and liabilities:               
Notes receivable   217,436    (986,826)   (141,623)
Trade accounts receivable   (11,251,794)   5,412,201    776,723 
Inventories   (150,754)   (551,200)   (79,105)
Other receivable   (6,468,866)   1,364,500    195,824 
Purchase advance   (3,105,872)   1,108,902    159,142 
Contract assets   (11,115,958)   (9,951,981)   (1,428,241)
Prepaid expense   (124,589)   116,917    16,779 
Prepaid expense - related parties   -    217,600    31,228 
Operating lease liabilities   -    (610,000)   (87,543)
Trade accounts payable   740,274    362,758    52,061 
Other payables   (1,218,860)   (160,316)   (23,007)
Other payables-related parties   3,122    1,790,155    256,911 
Advance from customers   4,462,975    1,904,753    273,357 
Accrued payroll and employees' welfare   285,135    1,501,406    215,472 
Taxes payable   645,328    650,855    93,406 
Net cash (used in) provided by operating activities   (27,041,252)   265,639    38,123 
                
Cash flows from investing activities:               
Investment in unconsolidated entity   (3,815,080)   -    - 
Purchases of property and equipment   (283,129)   (12,967)   (1,861)
Proceeds from disposal of equipment   -    900    129 
Repayments from loans to third parties   -    4,960,000    711,826 
Payments and prepayments for construction in progress   (4,411,620)   (1,297,663)   (186,232)
Net cash (used in) provided by investing activities   (8,509,829)   3,650,270    523,862 
                
Cash flows from financing activities:               
Proceeds from short-term borrowings   1,031,507    -    - 
Repayments of short-term borrowings   -    (1,081,096)   (155,152)
Proceeds from short-term borrowings-related parties   5,000,000    13,115,000    1,882,176 
Repayments of short-term borrowings-related parties   (5,000,000)   (10,195,000)   (1,463,118)
Repayments of long-term borrowings-related party   (334,513)   (365,530)   (52,458)
Refund of capital contribution by a non-controlling shareholder   (200,000)   -    - 
Capital contribution by non-controlling shareholders   500,000    405,000    58,123 
Net cash provided by financing activities   996,994    1,878,374    269,571 
                
Effect of exchange rate fluctuation on cash   1,195,329    9,611    1,380 
                
Net (decrease) increase in cash   (33,358,758)   5,803,894    832,936 
Cash at beginning of period   45,340,578    4,521,325    648,870 
Cash at end of period  ¥11,981,820   ¥10,325,219   $1,481,806 
                
                
Supplemental cash flow information               
Cash paid during the period for interest  ¥805,613   ¥718,201   $103,071 
Cash paid (received) during the period for taxes  ¥2,002   ¥(2,002)  $(287)
                
Non-cash investing and financing activities               
Issuance of common stock in exchange of shares of FGS, net of issuance costs  ¥21,433,796   ¥-   $- 
Investment payable in exchange of interest of FGS  ¥6,400,000   ¥-   $- 
Right-of-use assets obtained in exchange for operating lease obligations  ¥-   ¥1,228,963   $176,372 
Payable for construction in progress  ¥5,957,463   ¥236,302   $33,912 
Receivable for disposal of property and equipment  ¥-   ¥5,000   $718 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements 

 F-5 

 

RECON TECHNOLOGY, LTD

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1. ORGANIZATION AND NATURE OF OPERATIONS

 

Organization – Recon Technology, Ltd (the “Company”) was incorporated under the laws of the Cayman Islands on August 21, 2007 as a limited liability company. The Company provides specialized equipment, automation systems, tools, chemicals and field services to energy industry companies mainly in the People’s Republic of China (the “PRC”).

 

The Company, along with its wholly-owned subsidiaries, Recon Technology Co., Limited (“Recon HK”), Recon Investment Ltd. (“Recon IN”) and Recon Hengda Technology (Beijing) Co., Ltd. (“Recon-BJ”), conducts its business through the following PRC legal entities (“Domestic Companies”) that are consolidated as variable interest entities (“VIEs”) and operate in the Chinese energy industry:

 

  1. Beijing BHD Petroleum Technology Co., Ltd. (“BHD”),

 

  2. Nanjing Recon Technology Co., Ltd. (“Nanjing Recon”).

 

The Company has signed Exclusive Technical Consulting Service Agreements with each of the Domestic Companies, which are its VIEs, and Equity Interest Pledge Agreements and Exclusive Equity Interest Purchase Agreements with their shareholders. Through these contractual arrangements, the Company has the ability to substantially influence each of the Domestic Companies’ daily operations and financial affairs, appoint their senior executives and approve all matters requiring shareholder approval. As a result of these contractual arrangements, which enable the Company to control the Domestic Companies, the Company is considered as the primary beneficiary of each Domestic Company. Thus, the Company is able to absorb 90% of net interest or 100% of net loss of those VIEs.

 

On February 21, 2019, the Company’s board of directors approved transferring the VIEs and VIE-controlled companies from Jining Recon Technology Ltd. (“Recon-JN”) to Recon-BJ. At the time, both Recon-JN and Recon-BJ were the Company’s wholly owned subsidiaries in China. On April 1, 2019, the Company completed the VIE transfer process and then completed the dissolution of Recon-JN on April 10, 2019. The Company does not expect any negative impact of this process on its operations.

 

On December 17, 2015, Huang Hua BHD Petroleum Equipment Manufacturing Co. LTD, a fully owned subsidiary established by BHD was organized under the laws of the PRC.

 

Gan Su BHD Environmental Technology Co., Ltd (“Gan Su BHD”) was established on May 23, 2017, with registered capital of ¥50 million. The paid in capital was ¥20,735,000 ($2,975,748) as of December 31, 2019. BHD owns an interest of 51% of Gan Su BHD, which is focusing on oilfield sewage treatment and oily sludge disposal projects.

 

Qing Hai BHD New Energy Technology Co., Ltd. (“Qinghai BHD”) was established on October 16, 2017, with registered capital of ¥50 million. The paid in capital was ¥4,200,000 ($602,756) as of December 31, 2019. BHD owned an interest of 55% of Qinghai BHD previously; however, based on an agreement signed by the shareholders of Qinghai BHD dated October 23, 2018, each of the other two individual shareholders agreed to reduce 10% of their equity interests. As a result, Qinghai BHD returned ¥200,000 paid in capital back to one of the individual shareholders. After the new arrangement, BHD owns a total interest of 75% of Qinghai BHD. The remaining paid in capital should be contributed by BHD and the other individual shareholder is ¥33,300,000 ($4,778,992) and ¥12,500,000 ($1,793,916), respectively. Based on its charter dated September 29, 2017, the remaining paid in capital will be injected before September 29, 2036.

 

Nature of Operations – The Company engages in (1) providing equipment, tools and other components and parts related to oilfield production and other energy industries companies, including simple installations in connection with some projects; (2) services to improve production and efficiency of exploited oil wells, (3) developing and selling its own specialized industrial automation control and information solutions, and (4) design, test and implement solution of sewage and oily sludge treatment, production and sales of related integrated equipment and project services.

 

 F-6 

 

RECON TECHNOLOGY, LTD

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2. LIQUIDITY

 

As reflected in the Company’s unaudited condensed consolidated financial statements, the Company had recurring net losses for the six months ended December 31, 2018 and 2019. In assessing its liquidity, management monitors and analyzes the Company’s cash on-hand and its ability to generate sufficient revenue sources in the future to support its operating and capital expenditure commitments. The Company’s liquidity needs are to meet its working capital requirements, operating expenses and capital expenditure obligations. Debt financing in the forms of loans payable and loans from related parties have been utilized to finance the working capital requirements of the Company.

 

Despite those negative financial trends, the Company has positive working capital and management has plans to enhance its liquidity:

 

  1) The Company has been enhancing the collection of current receivable balances. As of February 29, 2020, about ¥12.5 million ($1.8 million) has been collected.

 

  2) The Company is mainly financed through borrowing from shareholders and senior management. On August 31, 2019, two major shareholders of the Company signed a 3-year commitment letter to support the Company and whenever the Company met liquidity difficulty, they will provide working capital to support daily operation of the Company.

 

  3) The Company may also consider financing directly from a commercial bank by contract pledge or discount of notes receivable.

 

Management believes that the foregoing measures collectively will provide sufficient liquidity for the Company to meet its future liquidity and capital obligations.

 

NOTE 3. SIGNIFICANT ACCOUNTING POLICIES

 

Basis of presentation - The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) and have been consistently applied.

 

Principles of Consolidation - The unaudited condensed consolidated financial statements include the accounts of the Company, all the subsidiaries and VIEs of the Company. All transactions and balances between the Company and its subsidiaries and VIEs have been eliminated upon consolidation.

 

Variable Interest Entities - A VIE is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of a controlling financial interest. A VIE is consolidated by its primary beneficiary. The primary beneficiary has both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the VIE. The Company performs ongoing assessments to determine whether an entity should be considered a VIE and whether an entity previously identified as a VIE continues to be a VIE and whether the Company continues to be the primary beneficiary.

 

Assets recognized as a result of consolidating VIEs do not represent additional assets that could be used to satisfy claims against the Company’s general assets. Conversely, liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets; rather, they represent claims against the specific assets of the consolidated VIEs.

 

Currency Translation - The Company’s functional currency is the Chinese Yuan (“RMB”) and the accompanying unaudited condensed consolidated financial statements have been expressed in Chinese Yuan. The unaudited condensed consolidated financial statements as of and for the six months ended December 31, 2019 have been translated into United States dollars (“U.S. dollars”) solely for the convenience of the readers. The translation has been made at the rate of ¥6.9680 = US$1.00, the approximate exchange rate prevailing on December 31, 2019. These translated U.S. dollar amounts should not be construed as representing Chinese Yuan amounts or that the Chinese Yuan amounts have been or could be converted into U.S. dollars.

 

 F-7 

 

RECON TECHNOLOGY, LTD

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Estimates and assumptions - The preparation of the unaudited condensed consolidated financial statements in conformity with US GAAP, which requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Estimates are adjusted to reflect actual experience when necessary. Significant accounting estimates reflected in the Company’s unaudited condensed consolidated financial statements include allowance for doubtful accounts related to trade accounts receivable, other receivables and purchase advances, allowance for inventory, the useful lives of property and equipment, valuation allowance for deferred tax assets, impairment assessment for long-lived assets and investment and the fair value of share- based payments. The use of estimates is an integral component of the financial reporting process; actual results could differ from those estimates.

 

The key assumptions underlying the Company’s accounting for material arrangements and the reasonably likely material effects of resolving any uncertainties on the Company’s allowance for doubtful accounts related to purchase advances. The production of the Company’s products requires custom-made equipment from its suppliers. To ensure that it can secure the required customized equipment, the Company often needs to make full prepayment for its intended purchases. As a standard practice in the petroleum extraction industry, the Company generally must submit a bid in order to secure the sales contract. The bidding process generally takes between one month to one year and the timing depends on the size of the overall project, which timing and size are generally controlled by its client. In order to secure timely purchase delivery and to meet its product delivery schedule, the Company normally prepays for the purchase advances if the Company believes that it is more than likely to win the bid for the sales contract which is accounted as pre-contract costs. After winning the bid and securing the sale contract, the Company normally needs to deliver its products approximately within one week to six months. Based on the Company’s historical experience, the Company generally is able to realize its purchase advances on the customized equipment that it orders. If it subsequently confirms that the Company is unable to secure the planned contracts with a customer after making the advance payments for these planned contracts, the Company evaluates the probable recoverability of the pre-contract cost and charges to expenses when the Company determines that the recovery of such pre-contract cost is improbable.

 

Fair Values of Financial Instruments - The US GAAP accounting standards regarding fair value of financial instruments and related fair value measurements define fair value, establish a three-level valuation hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

The three levels of inputs are defined as follows:

 

Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.  

Level 3 inputs to the valuation methodology are unobservable.

 

The carrying amounts reported in the consolidated balance sheets for trade accounts receivable, other receivables, purchase advances, trade accounts payable, accrued liabilities, advances from customers, investment payable, short-term bank loan and short-term borrowings approximate fair value because of the immediate or short-term maturity of these financial instruments.

 

Trade Accounts and Other Receivables, net - Accounts receivable are carried at original invoiced amount less a provision for any potential uncollectible amounts. Accounts are considered past due when the related receivables are more than a year old. Provision is made against trade accounts and other receivables to the extent they are considered to be doubtful. Accounts are written off after extensive efforts at collection. Other receivables arise from transactions with non-trade customers.

 

Notes Receivable, net - Notes receivable represent short-term notes receivables issued by reputable financial institutions that entitle the Company to receive the full-face amount from the financial institutions at maturity, which generally range from three to six months from the date of issuance. 

 

Purchase Advances, net - Purchase advances are the amounts prepaid to suppliers for business activities, such as standard raw materials, supplies and services. These types of prepayments will be expensed when those products or services have been rendered or consumed.

 

Inventories, net - Inventories are stated at the lower of cost or net realizable value, on a first-in-first-out basis. The methods of determining inventory costs are used consistently from year to year. Allowance for inventory obsolescence is provided when the market value of certain inventory items is lower than the cost. 

 

 F-8 

 

RECON TECHNOLOGY, LTD

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Property and Equipment, net - Property and equipment are stated at cost. Depreciation on motor vehicles and office equipment is computed using the straight-line method over the estimated useful lives of the assets, which range from two to ten years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the assets.

 

Items  Useful life
Motor vehicles  5-10 years
Office equipment  2-5 years
Production equipment  10 years

 

Land Use Rights, net - According to the Chinese laws and regulations regarding land use rights, land in urban districts is owned by the State, while land in the rural areas and suburban areas, except otherwise provided for by the State, is collectively owned by individuals designated as resident farmers by the State. In accordance with the legal principle that land ownership is separate from the right to the use of the land, the government grants individuals and companies the rights to use parcels of land for a specified period of time. Land use rights which are usually prepaid, are stated at cost less accumulated amortization. Amortization is provided over the life of the land use rights, using the straight-line method. The estimated useful life is 50 years, based on the term of the land use rights.

 

Long-Lived Assets - Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. Fair value is determined based on the estimated discounted future cash flows expected to be generated by the asset. There were no impairments at June 30, 2019 and December 31, 2019.

 

Long-term investments

 

  -

Cost method investment - For an investee over which the Company does not have significant influence and a controlling interest, the Company carries the investment at cost and recognizes income for any dividend received from the distribution of the investee’s earnings.

 

The Company reviews its cost method investment for impairment whenever an event or circumstance indicates that an other-than-temporary impairment has occurred. The Company considers available quantitative and qualitative evidence in evaluating potential impairment of its cost method investment. An impairment charge is recorded if the carrying amount of an investment exceeds its fair value and such excess is determined to be other-than-temporary. No impairment loss on its cost method investment in unconsolidated entity was recorded during the six months ended December 31, 2018 and 2019.

 

  -

Equity method investment - For an investee over which the Company has the ability to exercise significant influence, but does not have a controlling interest, the Company accounted for those using the equity method. Significant influence is generally considered to exist when the Company has an ownership interest in the voting stock of the investee between 20% and 50%. Other factors, such as representation on the investee’s board of directors, voting rights and the impact of commercial arrangements, are also considered in determining whether the equity method of accounting is appropriate.

 

An impairment charge is recorded if the carrying amount of the investment exceeds its fair value and this condition is determined to be other-than-temporary. The Company did not record impairment losses on its equity method investment during the six months ended December 31, 2018 and 2019. The Company recorded an approximately ¥844,369 investment loss and ¥141,288 ($20,277) investment income on its equity method investment in unconsolidated entity during the six months ended December 31, 2018 and 2019.

 

 F-9 

 

RECON TECHNOLOGY, LTD

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Revenue Recognition - With adoption of Accounting Standard Codification (“ASC”) 606, “Revenue from Contracts with Customers”, revenue is now recognized when all of the following five steps are met: (i) identify the contract(s) with the customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations; (v) recognize revenue when (or as) each performance obligation is satisfied. The core principle underlying the new revenue recognition Accounting Standards Update (“ASU”) is that the Company recognizes revenue to represent the transfer of goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. The Company identifies contractual performance obligations and determines whether revenue should be recognized at a point in time or over time, based on when goods or services are provided to a customer.

 

Disaggregation of Revenues

 

Revenues are recognized when control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.

 

The following items represent the Company’s revenues disaggregated by revenue source. In accordance with ASC 606-10-50-5, the Company selects categories to present disaggregated revenue that depict how the nature, amount, timing, and uncertainty of revenues and cash flows are affected by economic factors and delivery conditions of products and fulfillment of obligations.

 

The Company’s disaggregation of revenues for the six months ended December 31, 2018 and 2019 is disclosed in Note 28.

 

Automation Products and Software; Equipment and Accessories

 

The Company generates revenues primarily through delivery of standard or customized products and equipment, including automation products, furnaces and related accessories. Revenue is recognized when products are delivered, and acceptance reports are signed off by customers.

 

The sale of automation products or our specialized equipment when combined with services represent a single performance obligation for the development and construction of a single asset. The Company may also provide installation services to clients as there may be such obligation in contracts. The promises to transfer the equipment and installation are not separately identifiable, which is evidenced by the fact that the Company provides significant services of integrating the goods and services into a single deliverable for which the customer has contracted. For such sales arrangements, the Company recognizes revenue using input method, based on the relationship between actual costs incurred compared to the total estimated costs for the contract. Such method is adopted because the Company believes it best depicts the transfer of goods and services to the customer.

 

Oilfield Environmental Protection Service

 

The Company provides waste water treatment and oily sludge disposal service to oilfield and chemical industry companies and generates revenue from special equipment, self-developed chemical products and supporting service, transfer and treatment of oily sludge. Revenue is recognized when contract obligations have been performed. For such sales arrangements, the Company recognize revenue using input method, based on the relationship between actual costs incurred compared to the total estimated costs for the contract. Such method is adopted because the Company believes it best depicts the transfer of services to the customer.

 

Arrangements with Multiple Performance Obligations

 

Contracts with customers may include multiple performance obligations. For such arrangements, the Company will allocate revenues to each performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based on the prices charged to customers or using expected cost-plus margin.

 

 F-10 

 

RECON TECHNOLOGY, LTD

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Contract Balances

 

Contract balances typically arise when a difference in timing between the transfer of control to the customer and receipt of consideration occurs.

 

The following table provides information about contract assets and contract liabilities from contracts with customers:

 

  

June 30,

2019

  

December 31, 

2019

  

December 31, 

2019

 
   RMB   RMB   U.S. Dollars 
Contract assets  ¥4,633,940   ¥14,604,897   $2,095,996 
Contract liabilities  ¥120,000   ¥2,024,753   $290,579 

 

Contract Assets, net - The Company recognizes an asset from the costs incurred to fulfill a contract when those costs meet all of the following criteria: (i) the costs relate directly to a contract or to an anticipated contract that the Company can specifically identify; (ii) the costs generate or enhance resources of the Company that will be used in satisfying (or in continuing to satisfy) performance obligations in the future; and (iii) the costs are expected to be recovered.

 

  - Pre-Contract Costs - Pre-contract costs are the amounts prepaid to suppliers for purchases of customized equipment in anticipation of obtaining planned contracts for the Company’s hardware and software revenues. If it subsequently confirms that the Company is unable to secure the planned contracts with a customer after making the advance payments for these planned contracts, the Company evaluates the probable recoverability of the pre-contract cost and charges to expenses when the Company determines that the recovery of such pre-contract cost is improbable.

 

  - Executed Contract Costs - Direct costs, such as material, labor, depreciation and amortization and subcontracting costs and indirect costs allocable to contracts include the costs of contract supervision, tools and equipment, supplies, quality control and inspection, insurance, repairs and maintenance for quality assurance purposes before clients’ initial acceptance. Once products are delivered, installed and debugged for intended use and accepted by a client, which may last from weeks to months (this process is decided by the client’s individual project construction arrangement), the Company records revenue based on the contract or the final clients’ acceptance. Minor costs for repair during the maintenance period after initial acceptance are recorded as cost of goods sold as they are incurred. All other general and administrative costs and selling costs are charged to expenses as incurred. The Company generally ships its products approximately one week to six months after production begins and the timing depends on the size of the overall project.

 

Contract liabilities - Contract liabilities are recognized for contracts where payment has been received in advance of performance under the contract. The Company’s contract liabilities, which are reflected in its unaudited condensed consolidated balance sheets as advance from customers, consist primarily of the Company’s unsatisfied performance obligations as of the balance sheet dates. Contract liabilities are recognized as revenue after control of the products or services is transferred to the customer and all revenue recognition criteria have been met.

 

Performance Obligations - Performance obligations include delivery of products and installation of products. The Company recognizes revenue when performance obligations under the terms of a contract with its customer are satisfied. This occurs when the control of the goods and services have been transferred to the customer. Accordingly, revenue for sale of goods is generally recognized upon shipment or delivery depending on the shipping terms of the underlying contract. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods and providing installation services.

 

Amounts billed to customers for shipping and handling activities to fulfill the Company’s promise to transfer the goods are included in Sales, and costs incurred by the Company for the delivery of goods are classified as cost of sales in the consolidated statements of operations and comprehensive loss. Sales, value added, and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue. The Company generally offers assurance-type warranties for its products. The specific terms and conditions of those warranties vary depending upon the product. The Company estimates the costs that may be incurred under its warranties and records a liability in the amount of such costs at the time product revenue is recognized. Factors that affect the warranty liability include historical product-failure experience and estimated repair costs for identified matters. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. The amount accrued for expected returns and warranty claims was immaterial as of December 31, 2019. The amount of revenue recognized during the six months ended December 31, 2019 that was previously included within the deferred revenue and advances from customers balances was ¥Nil.

 

 F-11 

 

RECON TECHNOLOGY, LTD

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Practical Expedients Elected

 

Incremental Costs of Obtaining a Contract - The Company has elected the practical expedient permitted in ASC 340-40-25-4, which permits an entity to recognize incremental costs to obtain a contract as an expense when incurred if the amortization period will be less than one year.

 

Significant Financing Component - The Company has elected the practical expedient permitted in ASC 606-10-32-18, which allows an entity to not adjust the promised amount of consideration for the effects of a significant financing component if a contract has a duration of one year or less. As the Company’s contracts are typically less than one year in length, consideration will not be adjusted. The Company’s contracts include a standard payment term of 90 days to 180 days; consequently there is no significant financing component within contracts.

 

Share-Based Compensation - Share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense with graded vesting on a straight–line basis over the requisite service period for the entire award. The Company has elected to recognize compensation expenses using the Black-Scholes valuation model estimated at the grant date based on the award’s fair value.

 

Research and Development Expenses - Research and development expenses relating to improving development efficiency and the quality of the Company’s products and services, including s design of downhole automation platform systems and chemical products used for waste water treatment, are expensed as incurred.

 

Shipping and Handling Costs Shipping and handling cost incurred to ship products to customers are included in selling and distribution expenses. Shipping and handling expenses were ¥451,086 and ¥196,852 ($28,251) for the six months ended December 31, 2018 and 2019, respectively. 

 

Leases - The Company adopted ASC Topic 842, “Leases” on July 1, 2019 and used the alternative modified retrospective transition approach which permits the effects of adoption to be applied at the effective date. The new standard provides a number of optional practical expedients in transition. The Company elected the ‘package of practical expedients’, which permits the Company not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. The Company also elected the short-term lease exemption and combining the lease and non-lease components practical expedients. The most significant impact upon adoption relates to the recognition of new Right-of-use (“ROU”) assets and lease liabilities on the Company’s balance sheet for office space operating leases. Upon adoption, there was no cumulative effect of adopting the standard.

 

Income Taxes - Provisions for income taxes are based on taxes payable or refundable for the current year and deferred taxes. Deferred taxes are provided on differences between the tax bases of assets and liabilities and their reported amounts in the financial statements, and tax carry forwards. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The Company has not been subject to any income taxes in the United States or the Cayman Islands.

 

The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position would be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The Company has no uncertain tax position as of June 30, 2019 and December 31, 2019.

 

As of December 31, 2019, the tax years ended December 31, 2015 through December 31, 2019 for the Company’s People’s Republic of China (“PRC”) subsidiaries remain open for statutory examination by PRC tax authorities.

 

Loss per Share - Loss Per Share (“EPS”) is computed by dividing net loss by the weighted average number of ordinary shares outstanding. Diluted EPS are computed by dividing net loss by the weighted-average number of ordinary shares and dilutive potential ordinary share equivalents outstanding.

 

Potentially dilutive ordinary shares consist of ordinary shares issuable upon the conversion of ordinary stock options, restricted shares and warrants (using the treasury stock method). The effect from options, restricted shares and warrants would have been anti-dilutive due to the fact that the Company incurred a net loss for the six months ended December 31, 2018 and 2019.

 

 F-12 

 

RECON TECHNOLOGY, LTD

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Reclassification – Advance from customers has been reclassified from other payables and reflected in its unaudited condensed consolidated balance sheets and unaudited condensed consolidated statements of cash flows as advance from customers. Contract assets have been reclassified from purchase advance and inventories and reflected in unaudited condensed consolidated statements of cash flows as contract assets. These reclassifications have no effect on the results of operations previously reported.

 

Recently Issued Accounting Pronouncements

 

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement,” to improve the effectiveness of disclosures in the notes to financial statements related to recurring or nonrecurring fair value measurements by removing amounts and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. The new standard requires disclosure of the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company expects that the adoption of this ASU will not have a material impact on the Company’s unaudited condensed consolidated financial statements.

 

In October 2018, the FASB issued ASU 2018-17, "Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities". The new standard changes how entities evaluate decision-making fees under the variable interest entity guidance. The new standard is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted in any interim period after issuance. The standard should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings at the beginning of the period of adoption. The Company expects that the adoption of this ASU will not have a material impact on the Company’s unaudited condensed consolidated financial statements.

 

In November 2018, the FASB issued ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses.” ASU 2018-19 clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with ASC 842, Leases. The Company expects that the adoption of this ASU will not have a material impact on the Company’s unaudited condensed consolidated financial statements.

 

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes. The Board is issuing this Update as part of its initiative to reduce complexity in accounting standards (the Simplification Initiative). The objective of the Simplification Initiative is to identify, evaluate, and improve areas of GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The specific areas of potential simplification in this Update were submitted by stakeholders as part of the Simplification Initiative. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company expects that the adoption of this ASU will not have a material impact on the Company’s unaudited condensed consolidated financial statements.

 

The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the unaudited condensed consolidated financial position, statements of operations and cash flows.

 

 

 F-13 

 

RECON TECHNOLOGY, LTD

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 4. TRADE ACCOUNTS RECEIVABLE, NET

 

Accounts receivable, net consisted of the following:

 

   June 30,
2019
   December 31,
2019
   December 31, 
2019
 
Third Parties  RMB   RMB   U.S. Dollars 
Trade accounts receivable  ¥72,180,616   ¥66,768,415   $9,582,154 
Allowance for doubtful accounts   (3,645,334)   (3,704,972)   (531,713)
Total third-parties, net  ¥68,535,282   ¥63,063,443   $9,050,441 

 

   June 30,
2019
   December 31,
2019
   December 31, 
2019
 
Related Party  RMB   RMB   U.S. Dollars 
Urumqi Yikeli Automatic Control Equipment Co., Ltd.  ¥3,409,912   ¥3,409,912   $489,368 
Total related-party, net  ¥3,409,912   ¥3,409,912   $489,368 

 

Net recovery of provision made for doubtful accounts of accounts receivables due to third party was ¥1,305,399 for the six months ended December 31, 2018, and provision made for doubtful accounts of accounts receivables due to third party was ¥59,638 ($8,559) for the six months ended December 31, 2019.

 

Movement of allowance for doubtful accounts is as follows:

 

   June 30,
2019
   December 31, 
2019
   December 31, 
2019
 
   RMB   RMB   U.S. Dollars 
Beginning balance  ¥3,252,405   ¥3,645,334   $523,154 
Charge to expense   392,929    59,638    8,559 
Ending balance  ¥3,645,334   ¥3,704,972   $531,713 

 

NOTE 5. NOTES RECEIVABLE

 

Notes receivables represented the non-interest-bearing commercial bills the Company received from the customers for the purpose of collection of sales amount, which ranged from three to six months from the date of issuance. As of June 30, 2019 and December 31, 2019, notes receivable were ¥3,073,680 and ¥4,060,506 ($582,736), respectively, As of June 30, 2019 and December 31,2019, no notes were guaranteed or collateralized. 

 

NOTE 6. OTHER RECEIVABLES, NET

 

Other receivables, net consisted of the following:

 

Third Party  June 30,
2019
   December 31,
 2019
   December 31, 
2019
 
Current Portion  RMB   RMB   U.S. Dollars 
Business advances to officers and staffs (A)  ¥1,013,971   ¥594,404   $85,305 
Deposits for projects   1,400,892    1,521,387    218,339 
VAT recoverable   3,803,556    2,686,525    385,552 
Others   1,348,913    1,405,516    201,710 
    7,567,332    6,207,832    890,906 
Less: Long term portion (B)   (440,015)   (23,922)   (3,433)
Allowance for doubtful accounts   (1,461,724)   (1,399,099)   (200,789)
Other receivable - current portion  ¥5,665,593   ¥4,784,811   $686,684 

 

Net recovery of provision for doubtful accounts of other receivables was ¥330,280 and ¥62,625 ($8,988) for the six months ended December 31, 2018 and 2019, respectively.

 F-14 

 

RECON TECHNOLOGY, LTD

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

  (A) Business advances to officers and staffs represent advances for business travel and sundry expenses related to oilfield or on-site installation and inspection of products through customer approval and acceptance.

 

  (B) Long-term portion are mainly tender deposits for large-scale projects or rental contracts. These funds may not be collected back until projects are finished or contracts are completed.

 

Movement of allowance for doubtful accounts is as follows:

 

   June 30,
2019
   December 31, 
2019
   December 31, 
2019
 
   RMB   RMB   U.S. Dollars 
Beginning balance  ¥901,930   ¥1,461,724   $209,777 
Charge to (reversal of) expense   259,766    (62,625)   (8,988)
Add: reversal of bad debt allowance   300,028    -    - 
Ending balance  ¥1,461,724   ¥1,399,099   $200,789 

 

NOTE 7. LOANS TO THIRD PARTIES

 

   June 30,
2019
   December 31,
 2019
   December 31, 
2019
 
   RMB   RMB   U.S. Dollars 
Working fund to third party companies  ¥4,960,000   ¥                  -   $                - 
Allowance for doubtful accounts   -    -    - 
Total loans to third parties  ¥4,960,000   ¥-   $- 

 

Loans to third-parties are mainly used for short-term funding to support the Company’s external business partners. These loans bear no interest and have terms of no more than one year. The Company periodically reviewed the loans to third parties as to whether their carrying values remain realizable. The loans to third parties were fully collected back during the six months ended December 31, 2019.

 

NOTE 8. PURCHASE ADVANCES, NET

 

The Company purchased products and services from third parties during the normal course of business. Purchase advances, net consisted of the following:

 

   June 30,
2019
   December 31, 
2019
   December 31, 
2019
 
Third Party  RMB   RMB   U.S. Dollars 
Prepayment for others   1,592,076    483,174    69,342 
Allowance for doubtful accounts   (248,500)   (296,000)   (42,480)
Total purchase advances, net  ¥1,343,576   ¥187,174   $26,862 

 

Provision for doubtful accounts of purchase advances was ¥369,972 and ¥47,500 ($6,817) for the six months ended December 31, 2018 and 2019, respectively.

 

The Company recorded allowance for these advances and will continue to try to collect or get inventories delivered. These payments were advanced for certain customized equipment of the planned projects. As those projects were delayed or canceled or there is rare chance to be profitable, the Company decided to suspend those projects and recorded allowances related to advanced payments for those projects as the Company may not be able to receive those funds back. Management is still making efforts to collect partially or negotiate with venders for some other alternative solutions to minimize the Company’s loss.

 

Movement of allowance for doubtful accounts is as follows:

 

   June 30,
2019
   December 31, 
2019
   December 31, 
2019
 
   RMB   RMB   U.S. Dollars 
Beginning balance  ¥452,632   ¥248,500   $35,663 
Charge to expense   191,473    47,500    6,817 
Less: write-off   (395,605)   -    - 
Ending balance  ¥248,500   ¥296,000   $42,480 

 F-15 

 

RECON TECHNOLOGY, LTD

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 9. INVENTORIES, NET

 

Inventories consisted of the following:

 

   June 30,
2019
   December 31, 
2019
   December 31, 
2019
 
   RMB   RMB   U.S. Dollars 
Small component parts  ¥57,060   ¥57,061   $8,190 
Purchased goods and raw materials   226,868    270,952    38,885 
Work in process and goods on site   533,924    305,591    43,856 
Finished goods   452,671    1,162,807    166,878 
Allowance for slow moving inventory   -    -    - 
Total inventories, net  ¥1,270,523   ¥1,796,411   $257,809 

 

Provisions for slow moving inventory was ¥65,380 and ¥25,312 ($3,633) for the six months ended December 31, 2018 and 2019, respectively.

 

Movement of allowance for slow-moving inventories is as follows:

 

   June 30,
2019
   December 31, 
2019
   December 31, 
2019
 
   RMB   RMB   U.S. Dollars 
Beginning balance  ¥1,399,524   ¥-   $- 
Charge to cost of sales   65,380    25,312    3,633 
Less: Selling of slow-moving items   (1,464,904)   (25,312)   (3,633)
Ending balance  ¥-   ¥-   $- 

 

NOTE 10. CONTRACT ASSETS, NET

 

Contract assets, net consisted of the following:

 

   June 30,
2019
   December 31, 
2019
   December 31, 
2019
 
Third Party  RMB   RMB   U.S. Dollars 
Contract assets  ¥4,796,153   ¥14,748,134   $2,116,552 
Impairment of contract assets   (162,213)   (143,237)   (20,556)
Total contract assets, net  ¥4,633,940   ¥14,604,897   $2,095,996 

 

Net recovery of impairment of contract asset was ¥229,000 and ¥18,976 ($2,723) for the six months ended December 31, 2018 and 2019, respectively.

 

Movement of impairment of contract assets is as follows:

 

   June 30,
2019
   December 31, 
2019
   December 31, 
2019
 
   RMB   RMB   U.S. Dollars 
Beginning balance  ¥395,604   ¥162,213   $23,279 
Reversal of expense   (233,391)   (18,976)   (2,723)
Ending balance  ¥162,213   ¥143,237   $20,556 

 

 F-16 

 

RECON TECHNOLOGY, LTD

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 11. PROPERTY AND EQUIPMENT, NET

 

Property and equipment consisted of the following:

 

   June 30,
2019
   December 31, 
2019
   December 31, 
2019
 
   RMB   RMB   U.S. Dollars 
Motor vehicles  ¥4,923,152   ¥4,741,366   $680,449 
Office equipment and fixtures   1,350,235    1,363,202    195,638 
Production equipment   2,580,628    2,580,628    370,354 
Total property and equipment   8,854,015    8,685,196    1,246,441 
Less: Accumulated depreciation   (5,192,694)   (5,417,970)   (777,551)
Property and equipment, net  ¥3,661,321   ¥3,267,226   $468,890 
Construction in progress  ¥21,524,994   ¥23,143,654   $3,321,421 

 

On August 4, 2017, Gan Su BHD purchased the land use right of state-owned construction land in Yumen, Gan Su, in the amount of ¥1,361,969 ($195,460). The land use right was intended to establish production line of the oily sludge disposal projects. As of December 31, 2019, the main construction of the project has completed, and the total cost incurred in the project was ¥23,143,654 ($3,321,421). Currently, the project is in the testing stage and Gan Su BHD has received its temporary hazardous waste operating permit. The project has been ready for its intended use and put into production in January 2020.

 

Depreciation expenses were ¥501,837 and ¥397,972 ($57,114) for the six months ended December 31, 2018 and 2019, respectively.

 

Loss from property and equipment disposal was ¥Nil and ¥3,189 ($458) for the six months ended December 31, 2018 and 2019, respectively.

 

NOTE 12 - LAND USE RIGHTS

 

Land use rights consisted of the following:

 

   June 30,
2019
   December 31, 
2019
   December 31, 
2019
 
   RMB   RMB   U.S. Dollars 
Land use rights  ¥1,361,969   ¥1,361,969   $195,460 
Less: accumulated amortization   (54,082)   (67,702)   (9,716)
Land use rights, net  ¥1,307,887   ¥1,294,267   $185,744 

 

As of June 30, 2019 and December 31, 2019, no land use rights are collateralized or pledged.

 

Amortization expenses were ¥13,620 and ¥13,620 ($1,955) for the six months ended December 31, 2018 and 2019, respectively.

 

The estimated future amortization expenses are as follows:

 

Twelve months ending December 31,   RMB     U.S. Dollars  
2020   ¥ 27,239     $ 3,909  
2021     27,239       3,909  
2022     27,239       3,909  
2023     27,239       3,909  
2024     27,239       3,909  
Thereafter     1,158,072       166,199  
Total   ¥ 1,294,267     $ 185,744  

 

 F-17 

 

RECON TECHNOLOGY, LTD

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 13 – INVESTMENT IN UNCONSOLIDATED ENTITY

 

Investment in unconsolidated entity consisted of the following:

 

   June 30,
2019
   December 31, 
2019
   December 31, 
2019
 
   RMB   RMB   U.S. Dollars 
Future Gas Station (Beijing) Technology, Ltd  ¥31,078,971   ¥31,220,259   $4,480,521 

 

On August 21, 2018, the Company entered into a definitive investment agreement and a supplemental agreement (collectively, the “Agreement”) with FGS and the other shareholders of FGS. Following full performance under the Agreement, Recon will own 43% of FGS. As consideration for increasing its affiliates’ interest in FGS from 8% to 43%, the Company will (1) pay a total of RMB 10 million in cash to FGS and (2) issue 487,057 restricted ordinary shares of the Company (the “Restricted Shares”) to the other shareholders of FGS within 30 days after FGS finalizes recording the Company’s corresponding interest at the local governmental agency. If FGS does not reach certain performance goals, the Company has the right to cancel all of the Restricted Shares and without further payment. The Restricted Shares are also subject to lock-up period requirements that vary for each of FGS shareholders, from one year to three years following issuance of the Restricted Shares. FGS has finalized recording Recon’s corresponding interest at the local governmental agency, and Recon has issued 487,057 Restricted Shares in total to the other shareholders of FGS in August 2018.

 

On September 24, 2019, the Company signed an extension agreement with FGS and the other shareholders of FGS to postpone the Agreement to provide extra period for FGS to further fulfill the goals mentioned on the supplemental agreement. During the original contract period, FGS adjusted its operation model with an advanced improvement of its App and business model. Objected user and average Gross Merchandise Volume (GMV) of FGS’s App have been exceeded. FGS will need an extension to deploy its business in more provinces to complete a goal of 200 more gas stations.

 

On March 17, 2020, the Company signed a new supplemental agreement with FGS and the other shareholders of FGS to extend another 12 months to February 2021 for FGS and its shareholders to fulfill the goals mentioned on the supplemental agreement.

 

As of December 31, 2019, the Company has the investment amount of ¥35,257,995 ($5,059,990) in FGS, of which RMB 8.0 million was paid in cash, and owns 43% of the equity interests of FGS. The investments are accounted for using the equity method because the Company has significant influence, but no control of FGS. The Company recorded a loss of ¥844,369 and an income of ¥141,288 ($20,277) for the six months ended December 31, 2018 and 2019 from the investment, respectively, which was included in “Gain (loss) from investment in unconsolidated entity” in the unaudited condensed consolidated statements of operations and comprehensive loss. As of the date of this report, the Company is still obliged to pay RMB 6.4 million to FGS. 

 

 F-18 

 

RECON TECHNOLOGY, LTD

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 14 - LEASES

 

Effective July 1, 2019, the Company adopted the new lease accounting standard using the optional transition method which allowed the Company to continue to apply the guidance under the lease standard in effect at the time in the comparative periods presented. In addition, the Company elected the package of practical expedients, which allowed the Company to not reassess whether any existing contracts contain a lease, to not reassess historical lease classification as operating or finance leases, and to not reassess initial direct costs. The Company has not elected the practical expedient to use hindsight to determine the lease term for its leases at transition. The Company has also elected the practical expedient allowing the Company to not separate the lease and non-lease components for all classes of underlying assets. Adoption of this standard resulted in the recording of operating lease ROU assets and corresponding operating lease liabilities of ¥1,228,963 ($176,372) and ¥1,228,963 ($176,372), respectively, as of July 1, 2019 with no impact on accumulated deficit. Financial position for reporting periods beginning on or after July 1, 2019, are presented under the new guidance, while prior period amounts are not adjusted and continue to be reported in accordance with previous guidance.

 

The Company leases office spaces and factories under non-cancelable operating leases, with terms ranging from one to three years. The Company considers those renewal or termination options that are reasonably certain to be exercised in the determination of the lease term and initial measurement of right of use assets and lease liabilities. Lease expense for lease payment is recognized on a straight-line basis over the lease term. Leases with initial term of 12 months or less are not recorded on the balance sheet.

 

When available, the Company uses the rate implicit in the lease to discount lease payments to present value; however, most of the Company’s leases do not provide a readily determinable implicit rate. Therefore, the Company discount lease payments based on an estimate of its incremental borrowing rate.

 

The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

 

The table below presents the operating lease related assets and liabilities recorded on the balance sheets.

 

   December 31, 2019 
   RMB   U.S. Dollars 
Rights of use lease assets  ¥532,491   $76,420 
           
Operating lease liabilities – current   640,491    91,919 
Operating lease liabilities – non-current   -    - 
Total operating lease liabilities  ¥640,491   $91,919 

 

The weighted average remaining lease terms and discount rates for all of operating leases were as follows as of December 31, 2019:

 

   December 31,
2019
 
Remaining lease term and discount rate:     
Weighted average remaining lease term (years)   0.42 
Weighted average discount rate   5%

 

Rent expense were ¥1,249,655 and ¥1,216,704 ($174,613) for the six months ended December 31, 2018 and 2019, respectively.

 

The following is a schedule, by years, of maturities of lease liabilities as of December 31, 2019:

 

   December 31, 2019 
   RMB   U.S. Dollars 
2020  ¥646,000   $92,710 
Total lease payments   646,000    92,710 
Less: imputed interest   (5,509)   (791)
Present value of lease liabilities  ¥640,491   $91,919 

 

 F-19 

 

RECON TECHNOLOGY, LTD

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 15. OTHER PAYABLES

 

Other payables consisted of the following:

 

   June 30,
2019
   December 31,
2019
   December 31,
2019
 
Third Party  RMB   RMB   U.S. Dollars 
Service  ¥1,341,617   ¥667,051   $95,731 
Distributors and employees   219,095    735,155    105,504 
Accrued expenses   393,274    393,274    56,440 
Others   292,424    291,185    41,789 
Total  ¥2,246,410   ¥2,086,665   $299,464 

 

   June 30,
2019
   December 31,
2019
   December 31,
2019
 
Related Party  RMB   RMB   U.S. Dollars 
Expenses paid by the major shareholders  ¥2,029,908   ¥3,618,202   $519,260 
Due to family member of the owner of BHD   -    200,000    28,703 
Due to management staff for costs incurred on behalf of the Company   260,965    262,826    37,719 
Total  ¥2,290,873   ¥4,081,028   $585,682 

 

NOTE 16. TAXES PAYABLE

 

Taxes payable consisted of the following:

 

   June 30,
2019
   December 31, 
2019
   December 31, 
2019
 
   RMB   RMB   U.S. Dollars 
VAT payable  ¥1,732,736   ¥1,947,453   $279,486 
Income tax payable   440,031    758,831    108,902 
Other taxes payable   8,080    125,418    17,999 
Total taxes payable  ¥2,180,847   ¥2,831,702   $406,387 

 

NOTE 17. SHORT-TERM BANK LOAN

 

Short-term bank loan consisted of the following:

 

   June 30,
2019
   December 31,
2019
   December 31,
2019
 
   RMB   RMB   U.S. Dollars 
Bank of Nanjing, 5.655% annual interest, due on June 11, 2020  ¥2,500,000   ¥2,500,000   $358,783 
Total short-term bank loan  ¥2,500,000   ¥2,500,000   $358,783 

 

The loan is guaranteed by one of the founders of the Company.

 

Interest expense for the short-term bank loan was ¥Nil and ¥71,866 ($10,314) for the six months ended December 31, 2018 and 2019, respectively.

 

 F-20 

 

RECON TECHNOLOGY, LTD

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 18. SHORT-TERM BORROWINGS

 

Short-term borrowings due to third party consisted of the following:

 

   June 30,
2019
   December 31,
2019
   December 31,
2019
 
Short-term borrowings due to third party:  RMB   RMB   U.S. Dollars 
Short-term borrowing, 10% annual interest, due on September 8, 2019  ¥1,081,096   ¥        -   $       - 
Total short-term borrowings due to third party  ¥1,081,096   ¥-   $- 

 

Interest expense for short-term borrowings due to third party were ¥31,507 and ¥Nil for the six months ended December 31, 2018 and 2019, respectively.

 

The principle of this short-term borrowing was repaid in full by the Company on August 31, 2019.

 

Short-term borrowings due to related parties consisted of the following:

 

   June 30,
2019
   December 31,
2019
   December 31,
2019
 
Short-term borrowings due to related parties:  RMB   RMB   U.S. Dollars 
Short-term borrowing from a Founder, 5.65% annual interest, due on December 19, 2019*  ¥5,008,640   ¥-   $- 
Short-term borrowing from a Founder, 5.65% annual interest, due on March 27, 2020   4,001,885    4,001,885    574,324 
Short-term borrowing from a Founder, 5.65% annual interest, due on December 19, 2020        5,009,425    718,919 
Short-term borrowing from a Founder, interest-free, due on September 24, 2020^   -    450,000    64,581 
Short-term borrowing from a Founder's family member, interest-free, due on November 05, 2020^   -    2,470,000    354,477 
Total short-term borrowings due to related parties  ¥9,010,525   ¥11,931,310   $1,712,301 

 

No short-term borrowings due to related parties were guaranteed or collateralized at June 30, 2019 and December 31, 2019.

 

Interest expense for short-term borrowings due to related parties were ¥257,145 and ¥259,502 ($37,242) for the six months ended December 31, 2018 and 2019, respectively.

 

* The Company repaid the loans in full on maturity date.

 

^ During the six months ended December 31, 2019, the Company entered into a series of loan agreements with a Founder and a Founder’s family member for a total amount of ¥8,115,000 ($1,164,610) as working capital for six months to one year. All loans are non-interest bearing and can be repaid before their maturity dates. By December 31, 2019, the Company has repaid a total of ¥5,195,000 ($745,552) and the remaining balance of ¥2,920,000 ($419,058) is outstanding as of December 31, 2019.

 

 F-21 

 

RECON TECHNOLOGY, LTD

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 19. LONG-TERM BORROWINGS DUE TO RELATED PARTY

 

Long-term borrowings due to related party consisted of the following:

 

    June 30,
2019
    December 31,
2019
    December 31,
2019
 
Long-term borrowings due to related party:   RMB     RMB     U.S. Dollars  
Long-term borrowing from a Founder, monthly payments of ¥126,135 inclusive of interest at 8.90%, ten years loan, due in November 2027.   ¥ 8,977,001     ¥ 8,610,116     ¥ 1,235,666  
Less: current portion     (780,797 )     (813,334 )     (116,724 )
Total long-term borrowings due to related party   ¥ 8,196,204     ¥ 7,796,782     $ 1,118,942  

 

No long-term borrowings due to related party were guaranteed or collateralized at June 30, 2019 and December 31, 2019.

 

Interest expense for long-term borrowings due to related party was ¥421,058 and ¥389,926 ($55,960) for the six months ended December 31, 2018 and 2019, respectively.

 

The future maturities of long-term borrowings due to related party at December 31, 2019 are as follows:

 

Twelve months ending December 31,   RMB     U.S. Dollars  
2020   ¥ 813,334     $ 116,724  
2021     853,987       122,558  
2022     933,170       133,922  
2023     1,019,695       146,340  
2024     1,114,243       159,909  
Thereafter     3,875,687       556,213  
Total   ¥ 8,610,116     $ 1,235,666  

 

NOTE 20. ORDINARY SHARES

 

Stock offering 

 

On August 21, 2018, the Company entered into a definitive investment agreement and a supplemental agreement (collectively, the “Agreement”) with FGS and the other shareholders of FGS. Following full performance under the Agreement, Recon will own 43% of FGS. As consideration for increasing its affiliates’ interest in FGS from 8% to 43%, the Company will (1) pay a total of RMB 10 million in cash to FGS and (2) issue 487,057 restricted ordinary shares of the Company (the “Restricted Shares”) to the other shareholders of FGS within 30 days after FGS finalizes recording the Company’s corresponding interest at the local governmental agency. If FGS does not reach certain performance goals, the Company has the right to cancel without further payment part or all of the Restricted Shares. The Restricted Shares are also subject to lock-up period requirements that vary for each FGS shareholder, from two and a half years to four and a half years following issuance of the Restricted Shares under the supplemental agreement dated March 17, 2020. FGS has finalized recording Recon’s corresponding interest at the local governmental agency, and Recon issued 487,057 Restricted Shares in total to the other shareholders of FGS at a price of $6.4375 per restricted share on September 21, 2018.

 

On December 10, 2019, the Company’s Board approved to effect a one-for-five reverse stock split of its ordinary shares (the “Reverse Stock Split”) with the market effective date of December 27, 2019, such that the number of the Company’s ordinary shares is decreased from 100,000,000 to 20,000,000 and the par value of each ordinary share is increased from US$0.0185 to US$0.0925. As a result of the Reverse Stock Split, each five pre-split ordinary shares outstanding were automatically combined and converted to one issued and outstanding ordinary share without any action on the part of the shareholder. No fractional ordinary shares were issued to any shareholders in connection with the reverse stock split. Each shareholder was entitled to receive one ordinary share in lieu of the fractional share that would have resulted from the reverse stock split. As of December 26, 2019 (immediately prior to the effective date), there were 23,049,639 ordinary shares outstanding, and the number of ordinary shares outstanding after the Reverse Stock Split is 4,611,720, taking into account of the effect of rounding fractional shares into whole shares. In addition, all options and any other securities of the Company outstanding immediately prior to the Reverse Stock Split (to the extent they don’t provide otherwise) will be appropriately adjusted by dividing the number of ordinary shares into which the options and other securities are exercisable by 5 and multiplying the exercise price thereof by 5, as a result of the Reverse Stock Split.

 

 F-22 

 

RECON TECHNOLOGY, LTD

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Appropriated Retained Earnings

 

According to the Memorandum and Articles of Association, the Company is required to transfer a certain portion of its net profit, as determined under PRC accounting regulations, from current net income to the statutory reserve fund. In accordance with the PRC Company Law, companies are required to transfer 10% of their profit after tax, as determined in accordance with PRC accounting standards and regulations, to the statutory reserves until such reserves reach 50% of the registered capital or paid-in capital of the companies. As of June 30, 2019 and December 31, 2019, the balance of total statutory reserves was ¥4,148,929 and ¥4,509,040 ($647,107), respectively.

 

NOTE 21. STOCK-BASED COMPENSATION

 

Stock-Based Awards Plan

 

The following is a summary of the stock options activity:

 

Stock Options   Shares     Weighted
Average
Exercise Price
Per Share
 
Outstanding as of June 30, 2018     163,120     $ 15.20  
Granted     -       -  
Forfeited     -       -  
Exercised     -       -  
Outstanding as of June 30, 2019     163,120     $ 15.20  
Granted     -       -  
Forfeited     -       -  
Exercised     -       -  
Expired     38,600       30.00  
Outstanding as of December 31, 2019     124,520     $ 10.59  

 

 F-23 

 

RECON TECHNOLOGY, LTD

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The following is a summary of the status of options outstanding and exercisable at December 31, 2019:

 

Outstanding Options     Exercisable Options  
Average Exercise
Price
    Number     Average
Remaining
Contractual
life (Years)
    Average Exercise
Price
    Number     Average
Remaining
Contractual
life (Years)
 
$ 14.80       44,520       2.24     $ 14.80       44,520       2.24  
$ 8.25       80,000       5.09     $ 8.25       80,000       5.09  
           124,520                                         

 

The Share-based compensation expense recorded for stock options granted were both ¥Nil for the six months ended December 31, 2018 and 2019, respectively. No unrecognized share-based compensation for stock options as of December 31, 2019.

 

Restricted Shares to Senior Management and Employees

 

As of December 31, 2019, the Company has granted restricted shares of common stock to senior management and employees as follows:

 

On October 18, 2015, the Company granted 160,000 restricted shares to its employees and non-employee director as compensation cost for awards. The fair value of the restricted shares was $704,000 based on the closing stock price $4.40 at October 18, 2015. These restricted shares were vested over three years with one-third of the shares vesting every year from the grant date. As of June 30, 2017, 3,800 shares were forfeited and went back to the incentive pool due to some staffs’ resignation. All granted shares under this plan are fully vested on October 18, 2018.

 

On July 27, 2016, the Company granted 175,200 restricted shares to its employees and non-employee director as compensation cost for awards. The fair value of the restricted shares was $963,600 based on the closing stock price $5.50 at July 27, 2016. The Company also re-granted the previously forfeited 3,800 to its employees. These restricted shares will vest over three years with one-third of the shares vesting every year from the grant date. All granted shares under this plan are fully vested on July 27, 2019.

 

On December 9, 2016, the Company approved management's new plan based on future performance for the three fiscal years from 2017 to 2019. The Company also agreed on front-issuing of shares based on the optimism situation, thus non-vested 602,000 shares were issued to management on January 23 2017. The fair value of the restricted shares was $4,063,500 based on the closing stock price $6.75 at December 9, 2016. 160,000 shares were vested during the year ended June 30, 2018 based on the financial results for the year ended June 30, 2017. 192,000 shares were vested during the year ended June 30, 2019 based on the financial results for the year ended June 30, 2018. 250,000 shares were vested during the year ended June 30, 2019 based on the financial results for the year ended June 30, 2019.

 

On October 13, 2017, the Company granted 180,000 restricted shares to its employees as compensation cost for awards. The fair value of the restricted shares was $919,800 based on the closing stock price $5.11 at October 13, 2017. These restricted shares will vest over three years with one-third of the shares vesting every year from the grant date. As of December 31, 2019, 120,000 shares were vest and 60,000 will not be vested until October 13, 2020.

 

 F-24 

 

RECON TECHNOLOGY, LTD

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

On August 21, 2018, the Company granted 391,200 restricted shares to its employees as compensation cost for awards. The fair value of the restricted shares was $2,523,240 based on the closing stock price $6.45 at August 21, 2018. These restricted shares will vest over three years with one-third of the shares vesting every year from the grant date. The first 130,400 shares were vested on August 21, 2019. The remaining 260,800 will not be vested until August 21, 2020 and 2021, respectively.

 

Nil and 250,086 restricted shares were issued and outstanding for the six months ended December 31, 2018 and 2019, respectively, for all the plans mentioned above.

 

The share-based compensation expense recorded for restricted shares issued for management and employees were ¥9,539,917 and ¥4,057,093 ($582,247) for the six months ended December 31, 2018 and 2019, respectively. The total unrecognized share-based compensation expense of restricted shares issued for management and employees as of December 31, 2019 was approximately ¥11.29 million ($1.62 million), which is expected to be recognized over a weighted average period of approximately 1.51 years.  

 

Restricted Shares for service

 

As of December 31, 2019, the Company has granted restricted ordinary shares to consultants as follows:

 

On March 31, 2017, the Company approved the grant of 40,000 restricted shares with a value of $256,020 based on the closing stock price of $6.4005 on March 31, 2017 to designees of an independent consulting firm as payment for accounting management and consulting service. The vesting period of these shares was two-year from the date of contract. The 40,000 restricted shares were issued on November 17, 2017 and September 13, 2018, respectively.

 

On April 5, 2017, the Company approved the grant of 60,000 restricted shares with a value of $390,000 based on the closing stock price of $6.50 on April 5, 2017 to a company as payment for promotion PR/IR service. The vesting period of these shares was one year from the date of contract. 60,000 restricted shares were vested and no shares were issued as of date of this report.

 

On August 27, 2018, the Company approved the grant of 5,000 restricted shares with a value of $32,000 based on the closing stock price of $6.40 on August 27, 2018 to a company as payment for promotion PR/IR service. The vesting period of these shares was one year from the date of contract. 5,000 restricted shares were issued under this plan on August 27, 2018 and all granted shares under this plan are fully vested by August 27, 2019.

 

The Share-based compensation expense recorded for restricted shares issued for service were ¥516,194 and ¥33,927 ($4,869) for the six months ended December 31, 2018 and 2019, respectively. The total unrecognized share-based compensation expense of restricted shares issued for service as of December 31, 2019 was approximately ¥Nil.

 

 F-25 

 

RECON TECHNOLOGY, LTD

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Following is a summary of the restricted shares granted:

 

Restricted stock grants   Shares  
Non-vested as of June 30, 2018     808,400  
Granted     396,200  
Vested     (382,956 )
Non-vested as of June 30, 2019     821,644  
Granted     -  
Vested     (500,844 )
Non-vested as of December 31, 2019     320,800  

 

The following is a summary of the status of restricted stock at December 31, 2019:

 

Outstanding Restricted Shares  
Fair Value per
Share
    Number     Average
Remaining
Amortization
Period (Years)
 
$ 5.11       60,000       0.79  
$ 6.45       260,800       1.64  
          320,800          

 

NOTE 22. INCOME TAX

 

The Company is not subject to any income taxes in the United States or the Cayman Islands and had minimal operations in jurisdictions other than the PRC. BHD and Nanjing Recon are subject to PRC’s income taxes as PRC domestic companies. The Company follows Implementing Rules for the Enterprise Income Tax Law (“Implementing Rules”), which took effect on January 1, 2008 and unified the income tax rate for domestic-invested and foreign-invested enterprises at 25%.

 

Nanjing Recon was approved as a government-certified high-technology company and is subject to a reduced income tax rate of 15% through November 30, 2019. Nanjing Recon reapplied for high-technology enterprise review approval and is still under the government's verification procedures.

 

As approved by the domestic tax authority in the PRC, BHD was recognized as a government-certified high-technology company on November 25, 2009 and is subject to a reduced income tax rate of 15% through November 25, 2018. BHD reapplied for a high-technology company certificate, and the new certificate was approved as October 31, 2018 and will expire on October 31, 2021.

  

 F-26 

 

RECON TECHNOLOGY, LTD

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Income (loss) before provision for income taxes consisted of:

 

   June 30, 
2019
   December 31, 
2019
   December 31, 
2019
 
   RMB   RMB   U.S. Dollars 
Outside China areas  ¥(28,447,953)  ¥(7,624,668)  $(1,094,242)
China   3,064,024    904,020    129,739 
Total  ¥(25,383,929)  ¥(6,720,648)  $(964,503)

 

Deferred tax asset, net is composed of the following:

 

   June 30, 
2019
   December 31, 
2019
   December 31, 
2019
 
   RMB   RMB   U.S. Dollars 
Allowance for doubtful receivables  ¥832,515   ¥841,096   $120,708 
Impairment loss from investment in unconsolidated entity   605,660    605,660    86,920 
Net operating loss carryforwards   7,456,198    8,202,780    1,177,208 
Less: Valuation allowance   (8,894,373)   (9,649,536)   (1,384,836)
Deferred income tax assets, net  ¥-   ¥-   $- 

 

The Company’s income tax expense is composed of the following:

 

   For the six months ended December 31, 
   2018   2019   2019 
   RMB   RMB   U.S. Dollars 
Current income tax provision  ¥2,002   ¥316,799   $45,465 
Income tax expenses  ¥2,002   ¥316,799   $45,465 

 

NOTE 23. NON-CONTROLLING INTEREST

 

Non-controlling interest consisted of the following:

 

    As of June 30, 2019  
          Nanjing     Gan Su     Qinghai              
    BHD     Recon     BHD     BHD     Total     Total  
    RMB     RMB     RMB     RMB     RMB     U.S. Dollars  
Paid-in capital   ¥ 1,651,000     ¥ 200,000     ¥ 4,350,000     ¥ -     ¥ 6,201,000     $ 903,040  
Unappropriated retained earnings     3,477,493       3,616,002       (1,351,699 )     (826,664 )     4,915,132       715,783  
Accumulated other comprehensive loss     (18,850 )     (11,853 )     -       -       (30,703 )     (4,471 )
Total non-controlling interests   ¥ 5,109,643     ¥ 3,804,149     ¥ 2,998,301     ¥ (826,664 )   ¥ 11,085,429     $ 1,614,352  

 

    As of December 31, 2019  
          Nanjing     Gan Su     Qinghai              
    BHD     Recon     BHD     BHD     Total     Total  
    RMB     RMB     RMB     RMB     RMB     U.S. Dollars  
Paid-in capital   ¥ 1,651,000     ¥ 200,000     ¥ 4,755,000     ¥ -     ¥ 6,606,000     $ 948,049  
Unappropriated retained earnings     3,477,493       3,976,112       (2,001,743 )     (872,980 )     4,578,882       657,130  
Accumulated other comprehensive loss     (18,850 )     (11,853 )     -       -       (30,703 )     (4,406 )
Total non-controlling interests   ¥ 5,109,643     ¥ 4,164,259     ¥ 2,753,257     ¥ (872,980 )   ¥ 11,154,179     $ 1,600,773  

 

The Company received capital contribution from non-controlling shareholders of Gan Su BHD amounted to ¥500,000 and ¥405,000 ($58,123) during the six months ended December 31, 2018 and 2019, respectively. The Company returned ¥200,000 paid in capital back to one of the individual shareholders of Qing Hai BHD during the six months ended December 31, 2018.

 F-27 

 

RECON TECHNOLOGY, LTD

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 24. CONCENTRATIONS

 

For the six months ended December 31, 2018, CNPC represented approximately 44.1% and another customer represented approximately 22.3% of the Company’s revenue, respectively.

 

For the six months ended December 31, 2019, CNPC represented approximately 62.6%, SINOPEC represented approximately 13.1% and another customer represented approximately 19.7% of the Company’s revenue, respectively. At December 31, 2019, CNPC accounted for 41.6% and another customer accounted for 10.3% of the Company’s trade accounts receivable, net, respectively.

 

NOTE 25. COMMITMENTS AND CONTINGENCY

 

(a) Contingency

 

The Labor Contract Law of the PRC requires employers to assure the liability of severance payments if employees are terminated and have been working for the employers for at least two years prior to January 1, 2008. The employers will be liable for one month of severance pay for each year of the service provided by the employees. As of December 31, 2019, the Company estimated its severance payments of approximately ¥3.4 million ($0.5 million) which has not been reflected in its unaudited condensed consolidated financial statements, because management cannot predict what the actual payment, if any, will be in the future. 

 

(b) Purchase commitment

 

The total future minimum purchase commitment under the non-cancellable purchase contracts as of December 31, 2019 are payable as follows:

 

Year ending December 31,   Minimum purchase commitment  
2020   ¥ 2,093,010     $ 300,375  
Thereafter     -       -  
Total minimum payments required   ¥ 2,093,010     $ 300,375  

 

NOTE 26. RELATED PARTY TRANSACTIONS AND BALANCES

 

Sales to related partysales to related party consisted of the following:

 

   For the six months ended December 31, 
   2018   2019   2019 
   RMB   RMB   U.S. Dollars 
Urumqi Yikeli Automatic Control Equipment Co., Ltd.  ¥316,983   ¥            -   $              - 
Total revenues from related party  ¥316,983   ¥-   $- 

 

Prepaid expenses - related partiesprepaid expenses - related parties consisted of the following:

 

   June 30, 
2019
   December 31, 
2019
   December 31, 
2019
 
   RMB   RMB   U.S. Dollars 
Founders  ¥132,600   ¥                  -   $               - 
Founders' family member   85,000    -    - 
Total prepaid expenses - related parties  ¥217,600   ¥-   $- 

 

 F-28 

 

RECON TECHNOLOGY, LTD

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Leases from related parties - The Company has various agreements for the lease of office space owned by the Founders and their family members. The terms of the agreement state that the Company will continue to lease the property at a monthly rent of ¥140,000 with annual rental expense at ¥1.68 million ($0.24 million). The details of leases from related parties are as below:

 

            Monthly Rent     Monthly Rent  
Lessee   Lessor   Rent Period   RMB     USD  
Nanjing Recon   One of the Founders   April 1, 2018 - March 31, 2020   ¥ 60,000     $ 8,611  
BHD   One of the Founders   January 1, 2019 - December 31, 2019     22,500       3,229  
BHD   Founders' family member   January 1, 2019 - December 31, 2019     47,500       6,817  
Recon-BJ   One of the Founders   July 1, 2019 - June 30, 2020     10,000       1,435  

 

As of December 31, 2019, the operating lease ROU assets and corresponding operating lease liabilities of leases from related parties was ¥178,543 ($25,623) and ¥178,543 ($25,623), respectively.

 

 F-29 

 

RECON TECHNOLOGY, LTD

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 27. Variable Interest Entities

 

VIEs are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision making ability. All VIEs and their subsidiaries with which the Company is involved must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes.

 

Summary information regarding consolidated VIEs is as follows:

 

   June 30, 
2019
   December 31, 
2019
   December 31, 
2019
 
   RMB   RMB   U.S. Dollars 
ASSETS               
Current Assets               
Notes receivable  ¥444,763   ¥10,119,685   $1,452,309 
Trade accounts receivable, net   3,073,680    4,060,506    582,736 
Trade accounts receivable- related party, net   68,535,282    63,063,443    9,050,441 
Inventories, net   3,409,912    3,409,912    489,368 
Other receivables, net   1,270,523    1,796,411    257,809 
Loans to third parties   5,496,813    4,610,732    661,701 
Purchase advances, net   4,960,000    -    - 
Contract assets, net   1,343,576    156,550    22,467 
Prepaid expenses   4,633,940    14,604,897    2,095,996 
Prepaid expenses - related parties   -    65,920    9,460 
Notes receivable   217,600    -    - 
Total current assets   93,386,089    101,888,056    14,622,287 
                
Property and equipment, net   3,661,321    3,267,226    468,890 
Construction in progress   21,524,994    23,143,654    3,321,421 
Land use right, net   1,307,887    1,294,267    185,744 
Investment in unconsolidated entity   4,000,000    4,000,000    574,053 
Long-term other receivables, net   440,015    23,922    3,433 
Prepayments for construction in progress   1,144,098    1,059,404    152,039 
Right of use assets   -    532,491    76,420 
Total Assets  ¥125,464,404   ¥135,209,020   $19,404,287 
                
LIABILITIES               
Short-term bank loan  ¥2,500,000   ¥2,500,000   $2,107,973 
Trade accounts payable   14,089,293    14,688,353    232,245 
Other payables   946,941    1,618,283    232,245 
Other payable- related parties   1,532,662    2,838,598    407,376 
Advance from customers   120,000    2,024,753    290,579 
Accrued payroll and employees' welfare   988,785    1,798,811    258,153 
Taxes payable   2,180,805    2,831,679    406,383 
Short-term borrowings   1,081,096    -    358,783 
Short-term borrowings - related parties   9,010,525    11,931,310    1,712,301 
Long-term borrowings - related party - current portion   780,797    813,334    116,724 
Operating lease liabilities - current   -    640,491    91,919 
Total current liabilities   33,230,904    41,685,612    6,214,681 
                
Long-term borrowings - related party   8,196,204    7,796,782    1,118,942 
Total Liabilities  ¥41,427,108   ¥49,482,394   $7,333,623 

 

The financial performance of VIEs reported in the unaudited condensed consolidated statement of operations and comprehensive loss for the six months ended December 31, 2018 includes revenues of ¥42,271,729, operating expenses of ¥10,552,138, and net income of ¥3,268,099. The financial performance of VIEs reported in the unaudited condensed consolidated statement of operations and comprehensive loss for the six months ended December 31, 2019 includes revenues of ¥30,405,153 ($4,363,543), operating expenses of ¥10,137,918 ($1,454,926), and net loss of ¥371,397 ($53,300).

 F-30 

 

RECON TECHNOLOGY, LTD

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 28. SEGMENT REPORTING

 

ASC 280, “Segment Reporting,” establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organizational structure as well as information about geographical areas, business segments and major customers in financial statements for details on the Company’s business segments. The Company uses the “management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments. Management, including the chief operating decision maker, reviews operation results by the revenue of different products. Based on management’s assessment, the Company has determined that it has three operating segments: automation product and software, equipment and accessories and oilfield environmental protection.

 

The following tables present summary information by segment for the six months ended December 31, 2018 and 2019, respectively: 

 

   For the six months ended December 31, 
   2018   2019   2019 
   RMB   RMB   U.S. Dollars 
Automation product and software  ¥28,954,379   ¥22,572,055   $3,239,389 
Equipment and accessories   10,312,238    7,807,013    1,120,410 
Oilfield environmental protection   3,005,112    26,085    3,744 
Total revenue  ¥42,271,729   ¥30,405,153   $4,363,543 

 

All the Company’s revenue was generated from its business operation in China.

 

   For the six months ended December 31, 2019 
   Automation
product and
software
   Equipment
and
accessories
   Oilfield
environmental
protection
   Total 
   RMB   RMB   RMB   RMB 
Revenue  ¥22,572,055   ¥7,807,013   ¥26,085   ¥30,405,153 
Cost of revenue and related tax   13,991,321    4,174,481    271,439    18,437,241 
Gross profit  ¥8,580,734   ¥3,632,532   ¥(245,354)  ¥11,967,912 
Depreciation and amortization  ¥47,122   ¥350,850   ¥13,620   ¥411,592 
Total capital expenditures  ¥12,967   ¥-   ¥1,297,663   ¥1,310,630 

 

   For the six months ended December 31, 2018 
   Automation
product and
software
   Equipment
and
accessories
   Oilfield
environmental
protection
   Total 
   RMB   RMB   RMB   RMB 
Revenue  ¥28,954,379   ¥10,312,238   ¥3,005,112   ¥42,271,729 
Cost of revenue and related tax   18,549,248    6,690,414    1,794,975    27,034,637 
Gross profit  ¥10,405,131   ¥3,621,824   ¥1,210,137   ¥15,237,092 
Depreciation and amortization  ¥34,489   ¥467,348   ¥13,620   ¥515,457 
Total capital expenditures  ¥55,554   ¥227,575   ¥4,411,620   ¥4,694,749 

  

 F-31 

 

RECON TECHNOLOGY, LTD

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

    June 30, 
2019
   

December 31, 

2019

   

December 31, 

2019

 
    RMB     RMB     U.S. Dollars  
Total assets:                        
Automation product and software   ¥ 71,337,589     ¥ 75,168,686     $ 10,787,704  
Equipment and accessories     50,800,483       51,967,379       7,458,008  
Oilfield environmental protection     34,843,482       35,713,451       5,125,354  
Total Assets   ¥ 156,981,554     ¥ 162,849,516     $ 23,371,066  

 

NOTE 29. SUBSEQUENT EVENTS

 

These unaudited condensed consolidated financial statements were approved by management and available for issuance on March 18, 2020, and the Company has evaluated subsequent events through this date.

 

On March 16, 2020, the Board of Directors of the Company approved a term sheet between the Company and Network 1 Financial Securities, Inc (“Network 1”) to offer up to 712,630 of the Company’s ordinary shares through At the Market (“ATM”) offering transaction, which would be based on an effective F-3 shelf registration statement.

 

 F-32 

Exhibit 99.2 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis of our company’s financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors.

 

Overview

 

We are a company with limited liability incorporated in 2007 under the laws of the Cayman Islands. Headquartered in Beijing, we provide products and services to oil and gas companies and their affiliates through Nanjing Recon Technology Co. Ltd (“Nanjing Recon”) and Beijing BHD Petroleum Technology Co, Ltd (“BHD”), hereafter referred to as our domestic companies (the “Domestic Companies”), which are established under the laws of the People’s Republic of China (“PRC”). As the Company contractually controls the Domestic Companies, we serve as the center of strategic management, financial control and human resources allocation. Due to this contractual control and our obligation to bear the losses of the Domestic Companies, we consider them to be variable interest entities (“VIEs”) for accounting purposes and consolidate their results in our financial statements.

 

Through Nanjing Recon and BHD, our business is mainly focused on the upstream sectors of the oil and gas industry. From 2018, our business has been expanding to the downstream of the energy industry– the civil and industrial heating furnaces market, electric and coal chemical industry and the energy service management industry. We derive our revenues from the sales and provision of (1) automation products and projects, (2) equipment and installment for heating furnaces and overall energy saving resolution, (3) chemical products and overall resolution for waste water and oily sludge treatment, and (4) related engineering and project services for aforementioned.

 

  Nanjing Recon: Nanjing Recon is a high-tech company that specializes in automation services for oilfield companies. It mainly focuses on providing automation solutions to the oil exploration industry, including monitoring wells, automatic metering to the joint station production, process monitor, and a variety of oilfield equipment and control systems. From 2018, Nanjing Recon also provides automation products and services to other segments of the energy industry, such as the new energy industry, electric power and coal chemical industries.

  

  BHD: BHD is a high-tech company that specializes in transportation equipment and stimulation productions and services. Possessing proprietary patents and substantial industry experience, BHD has also been expanding services to oilfield wastewater and oily sludge treatment, and extended its heating products and resolutions to the civil market by leveraging its advantage on furnace products.

 

Recent Developments

 

On August 21, 2018, the Company entered into a definitive investment agreement and a supplemental agreement (collectively, the “Agreement”) with Future Gas Station (Beijing) Technology, Ltd (“FGS”) and the other shareholders of FGS. Following full performance under the Agreement, the Company will own 43% of FGS. As consideration for increasing its affiliates’ interest in FGS from 8% to 43%, Recon shall (1) pay a total of RMB 10 million in cash to FGS and (2) issue 2,435,284 restricted ordinary shares of Recon (the “Restricted Shares”) to the other shareholders of FGS within 30 days after FGS finalizes recording Recon’s corresponding interest at the local governmental agency. If FGS does not reach certain performance goals, Recon has the right to cancel without further paying part or all of the Restricted Shares. The Restricted Shares are also subject to lock-up period requirements that vary for each FGS shareholder, from two and a half years to four and a half years following the issuance of the Restricted Shares under the supplemental agreement dated March 17, 2020. As of the date of this report, FGS finalized recording Recon’s corresponding interest at the local governmental agency, and Recon issued 2,435,284   Restricted Shares in total to the other shareholders of FGS (converted to 487,060 Restricted Shares after the one-for-five reverse stock split took effect). Recon has invested RMB3.6 million in cash to FGS as of the date of this report under this agreement and has the obligation to pay the remaining RMB 6.4 million according to the agreement. On September 24, 2019, the Company agreed to extend the agreement for six more months as negotiated with FGS to ensure the founding team can better meet its obligations under the agreement. On March 17, 2020, the Company, FGS and the other shareholders of FGS signed a supplemental agreement to extend another 12 months as the number of the gas stations is the only performance goal that has not been achieved.

 

 

 

 

On December 10, 2019, the Company’s Board approved to effect a one-for-five reverse stock split of its ordinary shares (the “Reverse Stock Split”) with the market effective date of December 27, 2019, such that the number of the Company’s ordinary shares is decreased from 100,000,000 to 20,000,000 and the par value of each ordinary share is increased from US$0.0185 to US$0.0925. As a result of the Reverse Stock Split, each five pre-split ordinary shares outstanding were automatically combined and converted to one issued and outstanding ordinary share without any action on the part of the shareholder. No fractional ordinary shares were issued to any shareholders in connection with the reverse stock split. Each shareholder was entitled to receive one ordinary share in lieu of the fractional share that would have resulted from the Reverse Stock Split. As of December 26, 2019 (immediately prior to the effective date), there were 23,049,639 ordinary shares outstanding. The number of ordinary shares outstanding after the Reverse Stock Split was 4,611,720, taking into account of the effect of rounding fractional shares into whole shares. In addition, all options and any other securities of the Company outstanding immediately prior to the Reverse Stock Split (to the extent they don’t provide otherwise) will be appropriately adjusted by dividing the number of ordinary shares into which the options and other securities are exercisable by 5 and multiplying the exercise price thereof by 5, as a result of the Reverse Stock Split.

 

In January 2020, the World Health Organization declared the 2019-nCoV outbreak a global health emergency as the coronavirus outbreak continued to spread beyond China. In compliance with the government health emergency rules in place, we temporarily closed our offices in varies provinces in China and ceased production operations since Chinese New Year. We gradually resumed operation and production since February 10, 2020. In short term, we believe our business is being affected negatively. Our management believes the outbreak will have a negative impact on our operation result from the beginning of calendar year 2020 to date and in the whole fiscal year 2020. However, at this stage, we don’t expect a significant impact on the Company’s operation and financial results in a long run.

 

Recent Industry Developments and Business Outlook

 

Automation Department. As we continue to cooperate well with Shenhua Group, we expect our revenue from the automation department will increase. Also. we won the bid to build the automation system for PetroChina Jidong Oilfield Company ("Jidong Oilfield"). The winning price is RMB 9.5 million (approximately $1.36 million) per year, for a three-year construction period from January 1st, 2020 to December 31st, 2022. We believe it’s still a major trend for domestic energy companies to improve automation management and our business will benefit from this favorable trend.

 

Oilfield Environmental Protection Business. As of December 31, 2019, we had signed six disposal agreements to treat up to 1,700 tons of oily sludge, but only completed the treatment of 50 tons. Thus, the majority of the contract revenue from this business was not recognized during the half-year financials. We expect these workloads could be done by the end of fiscal year 2020.

 

New business. We invested in FGS in fiscal year 2018 and made additional investment into FGS in August 2018. The number of online orders generated through DT Refuel, an mobile application developed by FGS, is increasing and has reached to RMB 7 million per day on average with only 460 gas stations. FGS has been earning a net profit from July 2019. We believe this segment will face a chance of strong growth as FGS plans to expand its operation into more provinces in China in the coming months.

 

 

 

 

Monthly Gross Merchandise Volume (GMV) of DT Refuel APP Comparing 2019 v. 2018.

 

 

 

Growth Strategy

 

As a smaller China-focused company, our basic strategy focuses on developing our onshore oilfield business in the upstream sector of the industry. We continuously focus on providing high quality products and services in oilfields in which we have a geographical advantage. This helps us avoid conflicts of interest with bigger private companies while protecting our position within this market segment. Our mission is to increase the automation and safety levels of industrial petroleum production in China and improve the underdeveloped working process and management mode used by many companies by providing advanced technologies. At the same time, we are always looking to improve our business and to increase our earning capability.

 

Currently, as more markets of Chine’s energy industry are open to non-state-owned companies, we are also seeking for opportunities in other markets. We believe our experience on energy technics will always be our development foundation. By combining more technology and ideas developed in recent years, such as solar energy and Industrial Internet, we expect to create more profitable business lines.

 

Also, to diversify our revenue stream and lower risk of concentration, we will continue to seek new opportunities in other industries by leveraging our knowledge of intelligent equipment and the “Internet of things” (IoT).

 

 

 

 

Trend Information

 

Other than as disclosed elsewhere in this report, such as coronavirus outbreak, we are not aware of any trends, uncertainties, demands, commitments or events since the beginning of our fiscal year 2020 that are reasonably likely to have a material effect on our net revenues, income from operations, profitability, liquidity or capital resources, or that would cause the disclosed financial information to be not necessarily indicative of future operating results or financial condition.

 

Factors Affecting Our Results of Operations

 

Our operating results in any period are subject to general conditions typically affecting the Chinese oilfield service industry and included but are not limited to:

 

  oil and gas prices;

 

  the amount of spending by our customers, primarily those in the oil and gas industry;

 

  growing demand from large corporations for improved management and software designed to achieve such corporate performance;

 

  the procurement processes of our customers, especially those in the oil and gas industry;

 

  competition and related pricing pressure from other oilfield service solution providers, especially those targeting the Chinese oil and gas industry;

 

  the ongoing development of the oilfield service market in China; and

 

  inflation and other macroeconomic factors.

 

Unfavorable changes in any of these general conditions could negatively affect the number and size of the projects we undertake, the number of products we sell, the amount of services we provide, the price of our products and services, and otherwise affect our results of operations.

 

Our operating results in any period are more directly affected by company-specific factors including:

 

  our revenue growth, in terms of the proportion of our business dedicated to large companies and our ability to successfully develop, introduce and market new solutions and services;

 

  our ability to increase our revenues from both old and new customers in the oil and gas industry in China;

 

  our ability to effectively manage our operating costs and expenses; and

 

  our ability to effectively implement any targeted acquisitions and/or strategic alliances so as to provide efficient access to markets and industries in the oil and gas industry in China.

  

 

 

 

Critical Accounting Policies and Estimates

 

Consolidation of VIEs

 

A VIE is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of a controlling financial interest. A VIE is consolidated by its primary beneficiary. The primary beneficiary has both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the VIE. The Company performs ongoing assessments to determine whether an entity should be considered a VIE and whether an entity previously identified as a VIE continues to be a VIE and whether the Company continues to be the primary beneficiary.

 

Assets recognized as a result of consolidating VIEs do not represent additional assets that could be used to satisfy claims against the Company’s general assets. Conversely, liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets; rather, they represent claims against the specific assets of the consolidated VIEs.

 

Estimates and Assumptions

 

The preparation of the unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in United States of America (“US GAAP”), which requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Estimates are adjusted to reflect actual experience when necessary. Significant accounting estimates reflected in the Company’s unaudited condensed consolidated financial statements include allowance for doubtful accounts related to trade accounts receivable, other receivables and purchase advances, allowance for inventory, the useful lives of property and equipment, valuation allowance for deferred tax assets, impairment assessment for long-lived assets and investment and the fair value of share- based payments. The use of estimates is an integral component of the financial reporting process; actual results could differ from those estimates.

 

The key assumptions underlying the Company’s accounting for material arrangements and the reasonably likely material effects of resolving any uncertainties on the Company’s allowance for doubtful accounts related to purchase advances. The production of the Company’s products requires custom-made equipment from its suppliers. To ensure that it can secure the required customized equipment, the Company often needs to make full prepayment for its intended purchases. As a standard practice in the petroleum extraction industry, the Company generally must submit a bid in order to secure the sales contract. The bidding process generally takes between one month to one year and the timing depends on the size of the overall project, which timing and size are generally controlled by its client. In order to secure timely purchase delivery and to meet its product delivery schedule, the Company normally prepays for the purchase advances if the Company believes that it is more than likely to win the bid for the sales contract which is accounted as pre-contract costs. After winning the bid and securing the sale contract, the Company normally needs to deliver its products approximately within one week to six months. Based on the Company’s historical experience, the Company generally is able to realize its purchase advances on the customized equipment that it orders. If it subsequently confirms that the Company is unable to secure the planned contracts with a customer after making the advance payments for these planned contracts, the Company evaluates the probable recoverability of the pre-contract cost and charges to expenses when the Company determines that the recovery of such pre-contract cost is improbable.

 

 

 

 

Fair Values of Financial Instruments

 

The US GAAP accounting standards regarding fair value of financial instruments and related fair value measurements define fair value, establish a three-level valuation hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

The three levels of inputs are defined as follows:

 

Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.  

 

Level 3 inputs to the valuation methodology are unobservable.

 

The carrying amounts reported in the consolidated balance sheets for trade accounts receivable, other receivables, purchase advances, trade accounts payable, accrued liabilities, advances from customers, investment payable, short-term bank loan and short-term borrowings approximate fair value because of the immediate or short-term maturity of these financial instruments. 

 

Purchase Advances, net

 

Purchase advances are the amounts prepaid to suppliers for business activities, such as standard raw materials, supplies and services.  These types of prepayments will be expensed when those products or services have been rendered or consumed.

 

Revenue Recognition

 

With adoption of Accounting Standard Codification (“ASC”) 606, “Revenue from Contracts with Customers”, revenue is now recognized when all of the following five steps are met: (i) identify the contract(s) with the customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations; (v) recognize revenue when (or as) each performance obligation is satisfied. The core principle underlying the new revenue recognition Accounting Standards Update (“ASU”) is that the Company recognizes revenue to represent the transfer of goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. The Company identifies contractual performance obligations and determines whether revenue should be recognized at a point in time or over time, based on when goods or services are provided to a customer. 

 

Disaggregation of Revenues

 

Revenues are recognized when control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.

 

The following items represent the Company’s revenues disaggregated by revenue source. In accordance with ASC 606-10-50-5, the Company selects categories to present disaggregated revenue that depict how the nature, amount, timing, and uncertainty of revenues and cash flows are affected by economic factors and delivery conditions of products and fulfillment of obligations.

 

The Company’s disaggregation of revenues for the six months ended December 31, 2018 and 2019 is disclosed in Note 28 to the financial statements in Exhibit 99.1.

 

 

 

 

Automation Products and Software; Equipment and Accessories

 

The Company generates revenues primarily through delivery of standard or customized products and equipment, including automation products, furnaces and related accessories. Revenue is recognized when products are delivered, and acceptance reports are signed off by customers.

 

The sale of automation products or our specialized equipment when combined with services represent a single performance obligation for the development and construction of a single asset. The Company may also provide installation services to clients as there may be such obligation in contracts. The promises to transfer the equipment and installation are not separately identifiable, which is evidenced by the fact that the Company provides significant services of integrating the goods and services into a single deliverable for which the customer has contracted. For such sales arrangements, the Company recognizes revenue using input method, based on the relationship between actual costs incurred compared to the total estimated costs for the contract. Such method is adopted because the Company believes it best depicts the transfer of goods and services to the customer.

 

Oilfield Environmental Protection Service

 

The Company provides waste water treatment and oily sludge disposal service to oilfield and chemical industry companies and generates revenue from special equipment, self-developed chemical products and supporting service, transfer and treatment of oily sludge. Revenue is recognized when contract obligations have been performed. For such sales arrangements, the Company recognize revenue using input method, based on the relationship between actual costs incurred compared to the total estimated costs for the contract. Such method is adopted because the Company believes it best depicts the transfer of services to the customer.

 

Arrangements with Multiple Performance Obligations

 

Contracts with customers may include multiple performance obligations. For such arrangements, the Company will allocate revenues to each performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based on the prices charged to customers or using expected cost-plus margin.

 

Contract Balances

 

Contract balances typically arise when a difference in timing between the transfer of control to the customer and receipt of consideration occurs.

 

The following table provides information about contract assets and contract liabilities from contracts with customers:

 

    June 30,
2019
    December 31, 
2019
    December 31, 
2019
 
    RMB     RMB     U.S. Dollars  
Contract assets   ¥ 4,633,940     ¥ 14,604,897     $ 2,095,996  
Contract liabilities   ¥ 120,000     ¥ 2,024,753     $ 290,579  

 

 

 

 

Contract Assets, net - The Company recognizes an asset from the costs incurred to fulfill a contract when those costs meet all of the following criteria: (i) the costs relate directly to a contract or to an anticipated contract that the Company can specifically identify; (ii) the costs generate or enhance resources of the Company that will be used in satisfying (or in continuing to satisfy) performance obligations in the future; and (iii) the costs are expected to be recovered.

 

  - Pre-Contract Costs - Pre-contract costs are the amounts prepaid to suppliers for purchases of customized equipment in anticipation of obtaining planned contracts for the Company’s hardware and software revenues. If it subsequently confirms that the Company is unable to secure the planned contracts with a customer after making the advance payments for these planned contracts, the Company evaluates the probable recoverability of the pre-contract cost and charges to expenses when the Company determines that the recovery of such pre-contract cost is improbable.

 

  - Executed Contract Costs - Direct costs, such as material, labor, depreciation and amortization and subcontracting costs and indirect costs allocable to contracts include the costs of contract supervision, tools and equipment, supplies, quality control and inspection, insurance, repairs and maintenance for quality assurance purposes before clients’ initial acceptance. Once products are delivered, installed and debugged for intended use and accepted by a client, which may last from weeks to months (this process is decided by the client’s individual project construction arrangement), the Company records revenue based on the contract or the final clients’ acceptance. Minor costs for repair during the maintenance period after initial acceptance are recorded as cost of goods sold as they are incurred. All other general and administrative costs and selling costs are charged to expenses as incurred. The Company generally ships its products approximately one week to six months after production begins and the timing depends on the size of the overall project.

 

Contract liabilities - Contract liabilities are recognized for contracts where payment has been received in advance of performance under the contract. The Company’s contract liabilities, which are reflected in its unaudited condensed consolidated balance sheets as advance from customers, consist primarily of the Company’s unsatisfied performance obligations as of the balance sheet dates. Contract liabilities are recognized as revenue after control of the products or services is transferred to the customer and all revenue recognition criteria have been met.

 

Performance Obligations

 

Performance obligations include delivery of products and installation of products. The Company recognizes revenue when performance obligations under the terms of a contract with its customer are satisfied. This occurs when the control of the goods and services have been transferred to the customer. Accordingly, revenue for sale of goods is generally recognized upon shipment or delivery depending on the shipping terms of the underlying contract. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods and providing installation services.

 

Amounts billed to customers for shipping and handling activities to fulfill the Company’s promise to transfer the goods are included in Sales, and costs incurred by the Company for the delivery of goods are classified as Cost of sales in the Consolidated Statements of Operations and Comprehensive Loss. Sales, value added, and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue. The Company generally offers assurance-type warranties for its products. The specific terms and conditions of those warranties vary depending upon the product. The Company estimates the costs that may be incurred under its warranties and records a liability in the amount of such costs at the time product revenue is recognized. Factors that affect the warranty liability include historical product-failure experience and estimated repair costs for identified matters. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. The amount accrued for expected returns and warranty claims was immaterial as of December 31, 2019. The amount of revenue recognized during the six months ended December 31, 2019 that was previously included within the deferred revenue and advances from customers balances was ¥Nil.

 

Practical Expedients Elected

 

Incremental Costs of Obtaining a Contract - The Company has elected the practical expedient permitted in ASC 340-40-25-4, which permits an entity to recognize incremental costs to obtain a contract as an expense when incurred if the amortization period will be less than one year.

 

Significant Financing Component - The Company has elected the practical expedient permitted in ASC 606-10-32-18, which allows an entity to not adjust the promised amount of consideration for the effects of a significant financing component if a contract has a duration of one year or less. As the Company’s contracts are typically less than one year in length, consideration will not be adjusted. The Company’s contracts include a standard payment term of 90 days to 180 days; consequently, there is no significant financing component within contracts.

 

 

 

 

Trade Accounts and Other Receivables, net

 

Accounts receivable are carried at original invoiced amount less a provision for any potential uncollectible amounts. Accounts are considered past due when the related receivables are more than a year old. Provision is made against trade accounts and other receivables to the extent they are considered to be doubtful. Accounts are written off after extensive efforts at collection. Other receivables arise from transactions with non-trade customers.

 

Share-Based Compensation

 

Share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense with graded vesting on a straight–line basis over the requisite service period for the entire award. The Company has elected to recognize compensation expenses using the Black-Scholes valuation model estimated at the grant date based on the award’s fair value.

 

Recently enacted accounting pronouncements

 

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement,” to improve the effectiveness of disclosures in the notes to financial statements related to recurring or nonrecurring fair value measurements by removing amounts and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. The new standard requires disclosure of the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company expects that the adoption of this ASU will not have a material impact on the Company’s unaudited condensed consolidated financial statements.

 

In October 2018, the FASB issued ASU 2018-17, "Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities". The new standard changes how entities evaluate decision-making fees under the variable interest entity guidance. The new standard is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted in any interim period after issuance. The standard should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings at the beginning of the period of adoption. The Company expects that the adoption of this ASU will not have a material impact on the Company’s unaudited condensed consolidated financial statements.

 

In November 2018, the FASB issued ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses.” ASU 2018-19 clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with ASC 842, Leases. The Company expects that the adoption of this ASU will not have a material impact on the Company’s unaudited condensed consolidated financial statements.

 

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes. The Board is issuing this Update as part of its initiative to reduce complexity in accounting standards (the Simplification Initiative). The objective of the Simplification Initiative is to identify, evaluate, and improve areas of GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The specific areas of potential simplification in this Update were submitted by stakeholders as part of the Simplification Initiative. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company expects that the adoption of this ASU will not have a material impact on the Company’s unaudited condensed consolidated financial statements.

 

The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the unaudited condensed consolidated financial position, statements of operations and cash flows.

 

 

 

 

Results of Operations

 

The following consolidated results of operations include the results of operations of the Company and its variable interest entities (“VIEs”), BHD and Nanjing Recon, and subsidiaries of these VIEs.

 

Our historical reporting results are not necessarily indicative of the results to be expected for any future period.

 

Six Months Ended December 31, 2019 Compared to Six Months Ended December 31, 2018

 

During the six months ended December 31, 2019, our business and order maintained a moderate growth. Affected by the construction delay of GSBHD oily sludge treatment project, our revenue from oilfield environmental protection decreased temporarily, causing the overall revenue less than the same period of last year. As we focus more on the profitability during this period, our overall performance was improved. 

 

Revenue

 

   For the Six Months Ended 
   December 31, 
           Increase /   Percentage 
   2018   2019   (Decrease)   Change 
Automation product and software  ¥28,954,379   ¥22,572,055   ¥(6,382,324)   (22.0)%
Equipment and accessories   10,312,238    7,807,013    (2,505,225)   (24.3)%
Oilfield environmental protection   3,005,112    26,085    (2,979,027)   (99.1)%
Total revenue  ¥42,271,729   ¥30,405,153   ¥(11,866,576)   (28.1)%

 

Our total revenues for the six months ended December 31, 2019 were approximately ¥30.4 million ($4.4 million), a decrease of approximately ¥11.9 million ($1.7 million) or 28.1% from ¥42.3 million for the same period in 2018. The overall decrease in revenue was mainly due to the decreased revenue from all three segments during the six months ended December 31, 2019.

 

  (1) Revenue from automation product and software decreased by ¥6.4 million ($0.9 million) or 22.0%. The decreased revenue was mainly due to the decreased automation business projects from China Energy. To use fund more effectively and minimize the liquidity risk, we only took those orders with relatively higher margin, thus revenue from this part decreased.   

 

  (2) Revenue from equipment and accessories decreased by ¥2.5 million ($0.4 million) or 24.3%, as less sales of furnaces were sold to commercial and general industry markets.

 

  (3) Revenue from oilfield environmental protection decreased by ¥3.0 million ($0.4 million) or 99.1%.  As mentioned above, we have won contracts of over 1,708 tons of oily sludge treatment and collected the basic materials. As of December 31, 2019, we billed our customers ¥2.6 million ($0.4 million) in total and ¥0.7 million ($0.1 million) was received and recorded as advance from customer. We received ¥1.9 million ($0.3 million) in January 2020. Affected by late acceptance inspection of Gansu production project, revenue was not recognized during the six months ended December 31, 2019. We expect this revenue could be recognized and reflected in our financial data by end of fiscal year 2020.
     

 

 

 

Cost of revenue

 

   For the Six Months Ended 
   December 31, 
           Increase /   Percentage 
   2018   2019   (Decrease)   Change 
Automation product and software  ¥18,502,162   ¥13,774,763   ¥(4,727,399)   (25.6)%
Equipment and accessories   6,609,127    4,072,800    (2,536,327)   (38.4)%
Oilfield environmental protection   1,635,094    192,732    (1,442,362)   (88.2)%
Business and sales related tax   288,254    396,946    108,692    37.7%
Total cost of revenue  ¥27,034,637   ¥18,437,241   ¥(8,597,396)   (31.8)%

 

Our cost of revenues decreased from ¥27.0 million for the six months ended December 31, 2018 to ¥18.4 million ($2.6 million) for the same period in 2019, a decrease of ¥8.6 million ($1.2 million) or 31.8%. The overall decrease in cost of revenue was mainly due to the decreased cost of revenue from all three segments during the six months ended December 31, 2019, which is in line with the decrease in revenue.

 

Gross Profit

 

   For the Six Months Ended 
   December 31, 
   2018   2019   Increase /   Percentage 
   Gross Profit   Margin %   Gross Profit   Margin %   (Decrease)   Change 
Automation product and software  ¥10,405,131    35.9%  ¥8,580,734    38.0%  ¥(1,824,397)   (17.5)%
Equipment and accessories   3,621,824    35.1%   3,632,532    46.5%   10,708    0.3%
Oilfield environmental protection   1,210,137    40.3%   (245,354)   (940.6)%   (1,455,491)   (120.3)%
Total gross profit and margin %  ¥15,237,092    36.0%  ¥11,967,912    39.4%  ¥(3,269,180)   (21.5)%

 

Our gross profit decreased to ¥12.0 million ($1.7 million) for the six months ended December 31, 2019 from ¥15.2 million for the same period in 2018. Our gross profit as a percentage of revenue increased to 39.4% for the six months ended December 31, 2019 from 36.0% for the same period in 2018. While the gross profit margin of automation production and software remained relatively stable with a slight increase of 2.1%, gross profit margin of equipment and accessories increased by 11.4% due to higher margin equipment sales during the six months ended December 31, 2019 as we focused on higher margin business. However, since we didn’t launch the large-scale treatment of oily sludge treatment, also zero revenue was recognized and costs of pilot testing was recorded, resulting to a negative margin of oilfield environmental protection business. We believe this situation would be changed as we began the official treatment process in year 2020.

 

For the six months ended December 31, 2018 and 2019, gross profit from automation product and software was approximately ¥10.4 million and ¥8.6 million ($1.2 million), respectively, representing a decrease of approximately ¥1.8 million ($0.3 million) or 17.5%. The decrease in gross profit from automation product and software was in line with the decrease in revenue.

 

For the six months ended December 31, 2018 and 2019, gross profit from equipment and accessories was approximately ¥3.6 million and ¥3.6 million ($0.5 million), respectively, representing a slight increase of approximately ¥10,708 ($1,537) or 0.3% due to higher margin equipment sales as discussed above.

 

 

 

 

For the six months ended December 31, 2019, negative gross profit from oilfield environmental protection was approximately ¥0.2 million ($0.04 million) as compared to gross profit of ¥1.2 million for the same period last year, representing a decrease of approximately ¥1.5 million ($0.2 million) or 120.3%. The decrease in gross profit from oilfield environmental protection was primarily attributable to the decrease in revenue, as discussed above.

 

Operating Expenses

 

   For the Six Months Ended 
   December 31, 
           Increase /   Percentage 
   2018   2019   (Decrease)   Change 
Selling and distribution expenses  ¥4,909,361   ¥2,660,873   ¥(2,248,488)   (45.8)%
% of revenue   11.6%   8.8%   (2.8)%   - 
General and administrative expenses   18,903,138    13,366,413    (5,536,725)   (29.3)%
% of revenue   44.7%   44.0%   (0.7)%   - 
Provision for (net recovery of) doubtful accounts   (1,494,707)   25,537    1,520,244    (101.7)%
% of revenue   (3.5)%   0.1%   3.6%   - 
Research and development expenses   1,654,702    2,895,286    1,240,584    75.0%
% of revenue   3.9%   9.5%   5.6%   - 
Operating expenses  ¥23,972,494   ¥18,948,109   ¥(5,024,385)   (21.0)%

 

Selling and Distribution Expenses. Selling and distribution expenses consist primarily of salaries and related expenditures of the Company’s sales and marketing departments, sales commissions, costs of marketing programs including traveling expenses, advertising and trade shows, and rental expense, as well as shipping charges. Selling expenses decreased by 45.8% or ¥2.2 million ($0.3 million) for the six months ended December 31, 2019 compared to the same period in 2018. This decrease was primarily due to the decrease in traveling expenses as well as entertainment expenses as we tried to control our operating expenditures during the six months ended December 31, 2019. Selling expenses were 8.8% of total revenues for the six months ended December 31, 2019 and 11.6% of total revenues in the same period of 2018.

 

General and Administrative Expenses. General and administrative expenses consist primarily of costs in human resources, facilities costs, depreciation expenses, professional advisor fees, audit fees, stock-based compensation expense and other miscellaneous expenses incurred in connection with general operations. General and administrative expenses decreased by 29.3% or ¥5.5 million ($0.8 million), from ¥18.9 million in the six months ended December 31, 2018 to ¥13.4 million ($1.9 million) in the same period of 2019. The decrease in general and administrative expenses was mainly due to the decrease in stock-based compensation expense during the six months ended December 31, 2019. General and administrative expenses accounted for 44.0% of total revenues in the six months ended December 31, 2019 and 44.7% of total revenues for the same period of last year.

 

Provision for (net recovery of) doubtful accounts. Provision for doubtful accounts is the estimated amount of bad debt that will arise as a result of lower collectability from account receivables, other receivables and purchase advances. We recorded reversal of provision for doubtful accounts of ¥1.5 million for the six months ended December 31, 2018 as compared to a provision for doubtful accounts of ¥25,537 ($3,665) for the same period in 2019. The increase in provision for doubtful accounts was mainly resulted by additional provision made for long outstanding account receivables. Management will continue to monitor account receivables to maintain the provision at a lower risk level.

 

Research and development (“R&D”) expenses. Research and development expenses consist primarily of salaries and related expenditures for research and development projects. Research and development expenses increased from approximately ¥1.7 million for the six months ended December 31, 2018 to ¥2.9 million ($0.4 million) for the same period of 2019. This increase was primarily due to more research and development expense spent on design of new automation platform systems.

 

 

 

 

Net Loss

 

   For the Six Months Ended 
   December 31, 
           Increase /   Percentage 
   2018   2019   (Decrease)   Change 
Loss from operations  ¥(8,735,402)  ¥(6,980,197)  ¥1,755,205    (20.1)%
Other income (expense), net   (1,208,035)   259,549    1,467,584    (121.5)%
Loss before income taxes   (9,943,437)   (6,720,648)   3,222,789    (32.4)%
Provision for income taxes   2,002    316,799    314,797    15,724.1%
Net loss   (9,945,439)   (7,037,447)   2,907,992    (29.2)%
Less: Net income (loss) attributable to non-controlling interest   138,804    (336,250)   (475,054)   (342.2)%
Net loss attributable to Recon Technology, Ltd  ¥(10,084,243)  ¥(6,701,197)  ¥3,383,046    (33.5)%

 

Loss from operations. Loss from operations was ¥7.0 million ($1.0 million) for the six months ended December 31, 2019, compared to a loss of ¥8.7 million for the same period of 2018. This ¥1.8 million ($0.3 million) decrease in loss from operations was primarily due to a decrease in general and administrative expenses and selling and distribution expenses, partially offset by decrease in gross profit as discussed above.

 

Other income (expense), net. Other income, net was ¥0.3 million ($0.04 million) for the six months ended December 31, 2019, compared to other expense, net of ¥1.2 million for the same period of 2018. The ¥1.5 million ($0.2 million) decrease in other expense, net was primarily due to the decreased loss from investment in unconsolidated entity of ¥1.0 million ($0.1 million) and an increase in subsidy income of ¥0.6 million ($0.1 million) during the six months ended December 31, 2019.

 

Net loss. As a result of the factors described above, net loss was ¥7.0 million ($1.0 million) for the six months ended December 31, 2019, a decrease of ¥2.9 million ($0.4 million) from net loss of ¥9.9 million for the same period of 2018.

 

Liquidity and Capital Resources

 

As of December 31, 2019, we had cash in the amount of approximately ¥10.3 million ($1.5 million). As of June 30, 2019, we had cash in the amount of approximately ¥4.5 million.

 

Indebtedness. As of December 31, 2019, except for approximately ¥2.5 million ($0.4 million) of short-term bank loan, ¥11.9  million ($1.7 million) of short-term borrowings from related parties, and ¥8.6 million ($1.2 million) of long-term borrowings from a related party, and except that Gan Su BHD Environmental Technology Co., Ltd has a production line under construction in progress which the main construction of the project has completed, the project has been ready for its intended use and put into production in January 2020, we did not have any other finance leases or purchase commitments, guarantees or other material contingent liabilities.

 

Holding Company Structure. We are a holding company with no operations of our own. All of our operations are conducted through our Domestic Companies. As a result, our ability to pay dividends and to finance any debt that we may incur is dependent upon the receipt of dividends and other distributions from the Domestic Companies. In addition, Chinese legal restrictions permit payment of dividends to us by our Domestic Companies only out of their respective accumulated net profits, if any, determined in accordance with Chinese accounting standards and regulations. Under Chinese law, our Domestic Companies are required to set aside a portion (at least 10%) of their after-tax net income (after discharging all cumulated loss), if any, each year for compulsory statutory reserve until the amount of the reserve reaches 50% of our Domestic Companies’ registered capital. These funds may be distributed to shareholders at the time of each Domestic Company’s wind up.

 

 

 

 

Off-Balance Sheet Arrangements. We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts that are indexed to our own shares and classified as shareholders’ equity, or that are not reflected in our financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. Moreover, we do not have any variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

 

Capital Resources. To date we have financed our operations primarily through cash flows from operations, short-term and long-term borrowings due to related parties. As of December 31, 2019, we had total assets of ¥162.8 million ($23.4 million), which includes cash of ¥10.3 million ($1.5 million), net accounts receivable of ¥66.5 million ($9.5 million), and working capital of ¥51.4 million ($7.4 million). Shareholders' equity amounted to ¥93.0 million ($13.3 million).

 

Cash from Operating Activities. Net cash provided by operating activities was ¥0.3 million ($0.04 million) for the six months ended December 31, 2019. This was an increase of approximately ¥27.3 million ($3.9 million) compared to net cash used in operating activities of approximately ¥27.0 million for the six months ended December 31, 2018. The increase in net cash provided by operating activities for the six months ended December 31, 2019 was primarily attributable to the net loss available to the Company in the amount of ¥7.0 million ($1.0 million), and reconciled by restricted shares issued for management resulting in expenses of ¥4.1 million ($0.6 million), and an decrease in trade account receivable and other receivables, partly offset by an increase in contract assets.

 

Cash from Investing Activities. Net cash provided by investing activities was approximately ¥3.7 million ($0.5 million) for the six months ended December 31, 2019. This was an increase of approximately ¥12.2 million ($1.7 million) compared to net cash used in investing activities of approximately ¥8.5 million for the same period in 2018. This increase was due to the repayment from loans to third parties as well as decrease in investment in unconsolidated entity and payments and prepayments for construction in progress.

 

Cash from Financing Activities. Net cash provided by financing activities amounted to ¥1.9 million ($0.3 million) for the six months ended December 31, 2019, as compared to net cash provided by financing activities of ¥1.0 million for the same period in 2018. During the six months ended December 31, 2019, we received ¥13.1 million ($1.9 million) in short-term borrowings to related parties, repaid ¥10.2 million ($1.5 million) in short-term borrowings to related parties, and repaid ¥1.1 million ($0.2 million) in short-term borrowings from one third-party. We also received ¥0.4 million ($0.06 million) capital contribution by a non-controlling shareholder during the six months ended December 31, 2019.

 

Working Capital. Total working capital as of December 31, 2019 amounted to ¥51.4  million ($7.4 million), compared to ¥55.7 million as of June 30, 2019. Total current assets as of December 31, 2019 amounted to ¥102.3 million ($14.7 million), a slight increase of ¥4.5 million ($0.6 million) compared to approximately ¥97.8 million at June 30, 2019. The increase in total current assets at December 31, 2019 compared to June 30, 2019 was mainly due to an increase in cash, contract assets, partially offset by a decrease in trade account receivable and loans to third parties.

 

Current liabilities amounted to ¥50.9 million ($7.3 million) at December 31, 2019, in comparison to ¥42.1 million at June 30, 2019. This increase of current liabilities was attributable mainly to an increase in short-term borrowings from third parties and other payables.

 

Capital Needs. With the uncertainty of the current market, our management believes it is necessary to enhance collection of outstanding accounts receivable and other receivables, and to be cautious on operational decisions and project selection. Our management believes that our current operations can satisfy our daily working capital needs. We may also raise capital through public offerings or private placements of our securities to finance our development of our business and to consummate any merger and acquisition, if necessary.

 

 

 

Exhibit 99.3

 

 

800 3rd Avenue, 11th Floor, New York, NY 10022

Tel: +1 (646) 801-2803 | Fax: +1 (212) 601-2791

www.dgipl.com

 

  

Recon Technology, Ltd. Reports Financial Results for the First Six Months of Fiscal Year 2020

 

NEW YORK, Mar. 18, 2020 /PRNewswire/ -- Recon Technology, Ltd. (Nasdaq: RCON) (“Recon” or the “Company”), today announced its financial results for the first six months of fiscal year 2020.

 

First Six Months of Fiscal 2019 Financial:

 

·Total revenues for the six months ended December 31, 2019 decreased by 28.1% to $4.4 million (RMB30.4 million).
·Total cost of revenues for the six months ended December 31, 2019 decreased by 31.8% to $2.6 million (RMB18.4 million).
·Gross profit for the six months ended December 31, 2019 was $1.7 million (RMB12.0 million). Gross profit margin for the six months ended December 31, 2019 was 39.4%, an increase of 3.4 percentage points compared to the six months ended December 31, 2018.
·Net loss attributable to Recon for the six months ended December 31, 2019 was $1.0 million (RMB6.7 million), or $0.22 (RMB1.51) per basic and diluted share, compared to RMB10.1 million, or RMB2.72 per basic and diluted share, for the six months ended December 31, 2018.

  

Management Commentary

Mr. Shenping Yin, co-founder and CEO of Recon stated, “Ever since the year 2019, our management has been focusing on cash management and operating risk control, expanding our business structure from traditional oilfield service to some other energy sectors with higher margin and opportunities. As a result, for the six months ended December 31, 2019, the cash position and overall operation results were improved, and the total loss was narrowed. Besides, as our oily sludge treatment production was temporarily postponed by late acceptance inspection, the revenue from oilfield environmental protection was not recognized. We expect the production will be enabled and revenue to be earned later this year.”

 

Mr. Yin continued, “Due to the coronavirus disease 2019 outbreak, our business has slowed down in the short term. We believe the outbreak will affect our operation result from the beginning of calendar year 2020 to date and in the whole fiscal year 2020. However, we don’t expect a significant impact on the Company’s operation and financial results in the long run.”

 

 1 

 

 

First Six Months Fiscal 2020 Financial Results:

 

Revenue

 

Total revenues for the six months ended December 31, 2019 decreased by RMB11.9 million ($1.7 million) or 28.1%, to RMB30.4 million ($4.4 million) compared to RMB42.3 million for the six months ended December 31, 2018 mainly due to the decreased revenue from all three segments during the six months ended December 31, 2019.

 

Revenue from automation product and software decreased by RMB6.4 million ($0.9 million), or 22.0%, to RMB22.6 million ($3.2 million) for the six months ended December 31, 2019 from RMB29.0 million for the six months ended December 31, 2018, as the Company selected to take those orders with higher margin to optimize the use of cash rather than accepting all orders.

 

Revenue from equipment and accessories decreased by RMB2.5 million ($0.4 million), or 24.3%, to RMB7.8 million ($1.1 million) for the six months ended December 31, 2019 from RMB10.3 million for the six months ended December 31, 2018 as a result of less furnaces sold to commercial and general industry markets.

 

Revenue from oilfield environmental protection projects decreased by RMB3.0 million ($0.4 million), or 99.1%, to RMB26,085 ($3,744) for the six months ended December 31, 2019 from RMB3.0 million for the six months ended December 31, 2018. As of December 31, 2019, the Company won contracts of over 1,708 tons of oily sludge treatment and collected the basic materials. As of December 31, 2019, the Company billed the customers RMB2.6 million ($0.4 million) in total and RMB0.7 million ($0.1 million) was received and recorded as advance from customer. The Company received RMB1.9 million ($0.3 million) in January 2020. Affected by late acceptance inspection of Gansu production project, the Company is still in the process of treating oil sludge collected, hence, revenue was not recognized during the six months ended December 31, 2019. The Company expects this revenue could be recognized and reflected in the financial data by end of fiscal year 2020.

 

 2 

 

 

Cost and Margin

 

Total cost of revenues decreased by RMB8.6 million ($1.2 million), or 31.8%, to RMB18.4 million ($2.6 million) for the six months ended December 31, 2019. The decrease was mainly caused by decrease in cost of revenue from all three segments during the six months ended December 31, 2019, which is in line with the decrease in revenue.

 

Gross profit decreased by RMB3.3 million ($0.5 million), or 21.5%, to RMB12.0 million ($1.7 million) for the six months ended December 31, 2019 from RMB15.2 million from the six months ended December 31, 2018. The gross profit as a percentage of revenue increased to 39.4% for the six months ended December 31, 2019 from 36.0% for the same period in 2018. While the gross profit margin of automation production and software remained relatively stable with a slight increase of 2.1%, gross profit margin of equipment and accessories increased by 11.4% due to higher margin equipment sales during the six months ended December 31, 2019 as the Company focused on higher margin business. However, since the Company didn’t launch the large-scale treatment of oily sludge treatment, zero revenue was recognized and costs of pilot testing was recorded, resulting to a negative margin of oilfield environmental protection business. The Company believes this situation would change as the Company began the official treatment process in calendar year 2020.

 

Operating Expenses

 

Selling and distribution expenses decreased by RMB2.2 million ($0.3 million), or 45.8%, to RMB2.7 million ($0.4 million) for the six months ended December 31, 2019 from RMB4.9 million for the six months ended December 31, 2018. This decrease was primarily due to the decrease in traveling expenses as well as entertainment expenses as the Company tried to control the operating expenditures during the six months ended December 31, 2019.

 

General and administrative expenses decreased by RMB5.5 million ($0.8 million), or 29.3%, to RMB13.4 million ($1.9 million) for the six months ended December 31, 2019 from RMB18.9 million for the six months ended December 31, 2018. The decrease in general and administrative expenses was mainly due to the decrease in stock-based compensation expense during the six months ended December 31, 2019.

 

Provision for doubtful accounts was RMB25,537 ($3,665) for the six months ended December 31, 2019, compared to reversal of provision for doubtful accounts of RMB1.5 million for the six months ended December 31, 2018. The increase in provision for doubtful accounts was mainly resulted by additional provision made for long outstanding account receivables. Management will continue to monitor account receivables to maintain the provision at a lower risk level.

 

 3 

 

 

Research and development expenses increased from approximately RMB1.7 million for the six months ended December 31, 2018 to RMB2.9 million ($0.4 million) for the same period of 2019. This increase was primarily due to more research and development expense spent on design of new automation platform systems.

Net Loss

 

Loss from operations was RMB7.0 million ($1.0 million) for the six months ended December 31, 2019, compared to a loss of RMB8.7 million for the six months ended December 31, 2018. This RMB1.8 million ($0.3 million) decrease in loss from operations was primary due to a decrease in general and administrative expenses and selling and distribution expenses, partially offset by decrease in gross profit as discussed above.

 

Net loss was RMB7.0 million ($1.0 million) for the six months ended December 31, 2019, a decrease of RMB2.9 million ($0.4 million) from net loss of RMB9.9 million for the six months ended December 31, 2018. Net loss attributable to Recon for the six months ended December 31, 2018 was RMB10.1 million, or RMB2.72 per basic and diluted share, compared to RMB6.7 million ($1.0 million), or RMB1.51 ($0.22) per basic and diluted share for the six months ended December 31, 2019.

 

EBITDA

 

Adjusted EBITDA loss was RMB1.5 million ($0.2 million) for the six months ended December 31, 2019, compared to an adjusted EBITDA income of RMB0.9 million for the same period last year. Please see the section titled "Non-GAAP Financial Measures" below for a discussion of this metric, which the Company believes may be informative for investors but is not a GAAP financial measure.

 

Financial Condition

 

As of December 31, 2019, the Company had cash of RMB10.3 million ($1.5 million), compared to RMB4.5 million as of June 30, 2019. As of December 31, 2019, the Company had working capital of RMB51.4 million ($7.4 million) while as of June 30, 2019, the Company had working capital of RMB55.7 million.

 

 4 

 

 

Net cash provided by operating activities was RMB0.3 million ($0.04 million) for the six months ended December 31, 2019, compared to net cash used in operating activities of approximately RMB27.0 million for the six months ended December 31, 2018. Net cash provided by investing activities was RMB3.7 million ($0.5 million) for the six months ended December 31, 2019, compared to net cash used in investing activities RMB8.5 million for the six months ended December 31, 2018. Net cash provided by financing activities was RMB1.9 million ($0.3 million) for the six months ended December 31, 2019, compared to net cash provided by financing activities of RMB1.0 million for the six months ended December 31, 2018.

 

Exchange Rate

 

The translation of RMB amounts into U.S. dollars are included solely for the convenience of readers and have been made at the rate of RMB6.9680 to $1.00, the approximate exchange rate prevailing on December 31, 2019.

 

About Recon Technology, Ltd.

Recon Technology, Ltd. (RCON) is China's first non-state-owned oil and gas field service company listed on NASDAQ. Recon supplies China's largest oil exploration companies with advanced automated technologies, efficient gathering and transportation equipment and reservoir stimulation measures for increasing petroleum extraction levels, reducing impurities and lowering production costs. Since 2017, the Company has expanded its business operations into other segments of the broader energy industry including electric power, coal chemicals, renewable energy and environmental protection in the energy and chemical industries. Through the years, Recon has taken leading positions on several market segments of the oil and gas field service industry. Recon also has developed stable long-term cooperation relationships with its major clients, and its products and service are well accepted by clients. For additional information please visit: www.recon.cn.

 

Safe Harbor Statement

This news release contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other statements that are other than statements of historical facts. These statements are subject to uncertainties and risks including, but not limited to, product and service demand and acceptance, changes in technology, economic conditions, the impact of competition and pricing, government regulation, the effect of novel coronavirus and other health matters on target markets, and other risks contained in reports filed by the company with the Securities and Exchange Commission. All such forward-looking statements, whether written or oral, and whether made by or on behalf of the company, are expressly qualified by the cautionary statements and any other cautionary statements which may accompany the forward-looking statements. In addition, the company disclaims any obligation to update any forward-looking statements to reflect events or circumstances after the date hereof.

 

IR contact:

Dragon Gate Investment Partners LLC

Tel: +1(646)-801-2803

Email: RCON@dgipl.com

 

 

 5 

Exhibit 99.4

 

Supplemental Agreement No. 3 to the Investment Agreement with respect to Future Gas Station (Beijing) Technology Co., Ltd.

 

This Supplemental Agreement No. 3 to the Investment Agreement with respect to Future Gas Station (Beijing) Technology Co., Ltd. (“this Supplementary Agreement”) is made and entered into in Beijing, the People’s Republic of China (“China”, only for the purpose of this Supplemental Agreement, excluding Hong Kong Special Administrative Region, Macao Special Administration and Taiwan) on March 17, 2020 by and among:

 

1.Future Gas Station (Beijing) Technology Co., Ltd. (the “Company”), a limited liability company incorporated in Beijing, China under the laws of China, its unified social credit code: 91110108MA0033XK5Y, its legal representative: SONG Yang, domicile: Room 1315, Unit 2, 13/F, Building 36, Deshengmenwai Street, Xicheng District, Beijing.

 

2.SONG Yang, ID Card No.: XXXXXXXXXXXXXXXXXX

 

3.LIU Rui, ID Card No.: XXXXXXXXXXXXXXXXXX

 

4.PENG Zhizhuo, ID Card No.: XXXXXXXXXXXXXXXXXX

 

5.YAO Xing, ID Card No.: XXXXXXXXXXXXXXXXXX

 

6.YANG Gang, ID Card No.: XXXXXXXXXXXXXXXXXX

 

7.SONG Lin, ID Card No.: XXXXXXXXXXXXXXXXXX

 

8.Beijing Bright Petroleum Technology Co., Ltd. (“BHD”), a limited liability incorporated in Beijing, China under the laws of China.

 

9.NanJing Recon Technology Co., Ltd. (“NanJing Recon”), a limited liability company incorporated in Nanjing, China under the laws of China.

 

Among which:

 

SONG Yang, LIU Rui, PENG Zhizhuo and YAO Xing shall be hereinafter collectively referred to as “Founding Shareholders”, and BHD and NanJing Recon collectively as “Investors”; SONG Yang, LIU Rui, PENG Zhizhuo, YAO Xing, YANG Gang and SONG Lin shall be hereinafter individually as an “Existing Individual Shareholder” or collectively as the “Existing Individual Shareholders”, and Investors and Existing Individual Shareholders individually as a “Shareholder” or “Party” or collectively as the “Shareholders” or “Parties”.

 

 1 

 

 

Whereas:

 

1. The Parties executed the following agreements:

 

1)Investment Agreement with respect to Future Gas Station (Beijing) Technology Co., Ltd. (“Investment Agreement”) dated August 21, 2018;

 

2)Supplemental Agreement of Investment Agreement relating to Future Gas Station (Beijing) Technology Co., Ltd. (“Supplemental Agreement No. 1”) dated August 21, 2018;

 

3)Supplemental Agreement to the Investment Agreement with respect to Future Gas Station (Beijing) Technology Co., Ltd. (“Supplemental Agreement No. 2”) dated September 24, 2019.

 

2. Through Investment Agreement, Supplemental Agreement No. 1 and Supplemental Agreement No. 2, the Parties agreed that by February 20, 2020, i.e., extending for six months, the Company shall achieve the following performance goals: (1) the Company shall have 660 gas stations available for use; (2) the Company shall have 1,100,000 users actually using such gas stations; and (3) the Company’s daily platform trading volume shall reach RMB 3.3 million Yuan. In addition, the Recon Technology, Ltd shares issued to Existing Individual Shareholders are subject to certain lock-up terms listed by Supplemental Agreement No. 1 and its Exhibit I.

 

3. There was a typo in Supplemental Agreement No. 2: the number of 660 gas stations should be 670.

 

4. Although the Company has reached the (2) and (3) performance goals, it has not reached the (1) performance goal about the gas stations, and the Parties agree to extend the deadline for the performance goals for another twelve months from February 20, 2020, i.e. February 20, 2021.

  

Therefore, through friendly negotiation, the Parties reach this Supplemental Agreement No. 3 as follows. Capitalized terms not defined herein shall have the meaning as set forth in the previous agreements.

 

I.Provisions of Articles 5.1 and 5.2 of the Supplemental Agreement No. 1 are amended as:

 

5.1 The Restricted Shares granted by the Investors to the Existing Natural Person Shareholders at the closing of this Equity Purchase are limited by a lock-up period, where

 

(1) the lock-up period of the shares granted to Rui Liu, Zhizhuo Peng, Xing Yao and Lin Song is two and a half years after the granting of the shares and, upon expiry of such lock-up period, the Investors shall assist such Shareholders to unlock the shares;

 

 2 

 

 

(2) the lock-up period of the shares granted to Yang Song and Gang Yang is four and a half years, and shall be unlocked in three phases in the following way:

 

A. the Investors shall unlock 50% of the granted shares on the second-and-a-half anniversary of granting the shares if the goal agreed by both parties for the contract period is accomplished;

 

B. the Investors shall unlock 30% of the granted shares on the third-and-a-half anniversary of granting the shares if the goal agreed for the contract period is still maintained; and

 

C. the Investors shall unlock the remaining 20% of the granted shares on the fourth-and-a-half anniversary of granting the shares if the goal agreed for the contract period is still maintained.

 

5.2 On the second-and-half anniversary of the date of signing this Agreement, FGS shall fulfill and/or keep the following performance goals:

 

(1) The number of gas stations deployed by FGS reaches 670, an increase of 200 compared to the basis of 470 of the date of this Agreement;

 

(2) the number of users actually using the services of FGS reaches 1.1 million, an increase of 800,000 compared to the basis of 300,000 of the date of this Agreement; and

 

(3) the daily trading amount on the platform of FGS reaches RMB 3.3 million, an increase of RMB 2.70 million compared basis of RMB 600,000 of the date of this Agreement.

 

II.The Exhibit I Issuance of Restricted Shares to the Supplemental Agreement No. 1 is amended as the Exhibit I to this Supplemental Agreement No. 3.

 

III.This Supplemental Agreement No. 3 shall be a supplement to the Investment Agreement executed by and among the Parties. In the event of a conflict between the provisions of the previous agreements and this Supplemental Agreement No. 3, this Supplemental Agreement No. 3 shall prevail.

 

IV.The Supplemental Agreement No. 2 is hereby superseded and invalidated by this Supplemental Agreement No. 3.

 

V.This Supplemental Agreement No. 3 shall be signed in nine (9) originals, and each of the Company, Existing Individual Shareholders and Investors shall keep one (1).

 

VI.This Supplemental Agreement No. 3 shall become effective from the date when the Parties and their respective legal representatives affix signatures and/or official seals of the Company and Investors hereto.

 

 3 

 

 

(This page has no text and is the signature page of the Supplemental Agreement No. 3 to the Investment Agreement with respect to Future Gas Station (Beijing) Technology Co., Ltd.)

  

Company:

 

Future Gas Station (Beijing) Technology Co., Ltd. (Seal)

  

 

By: ________________________________________

Name: SONG Yang

Title: Legal Representative

 

 

Signature Page

 

 

(This page has no text and is the signature page of the Supplemental Agreement No. 3 to the Investment Agreement with respect to Future Gas Station (Beijing) Technology Co., Ltd.)

 

  

Existing Individual Shareholders:

 

SONG Yang

 

Signature:__________________________________

  

 

LIU Rui

 

Signature:__________________________________

  

 

PENG Zhizhuo

 

Signature:__________________________________

 

  

YAO Xing

 

Signature:__________________________________

 

  

YANG Gang

 

Signature:__________________________________

  

 

SONG Lin

 

Signature:__________________________________

 

Signature Page

 

 

(This page has no text and is the signature page of the Supplemental Agreement No. 3 to the Investment Agreement with respect to Future Gas Station (Beijing) Technology Co., Ltd.)

  

 

Investors

  

Beijing Bright Petroleum Technology Co., Ltd. (Seal)

 

 

By:______________________________________

Name: CHEN Guangqiang

Title: Legal Representative 

 

 

NanJing Recon Technology Co., Ltd. (Seal)

 

 

By:______________________________________

Name: YIN Shenping

Title: Legal Representative

 

Signature Page

 

 

 

Exhibit I Issuance of Restricted Shares

 

  Name   ID. No.   Address   Number of Restricted Shares(1)   Lock-up Term   Two and a half  Years Lock-up(1)(2)   Three and a half Years Lock-up(1)(2)   Four and a half
Years Lock-up(1)(2)
1.   Yang Song   XXXX             265,446    

50%: two and a half years

30%: three and a half years

20%: four and a half years

    132,723     79,634   53,089
2.   Gang Yang   XXXX             97,412    

50%: two and a half years

30%: three and a half years

20%: four and a half years

    48,706     29,224   19,482
3.   Rui Liu   XXXX             36,530     100%: two and a half years     36,530          
4.   Zhizhuo Peng   XXXX             36,530     100%: two and a half years     36,530          
5.   Xing Yao   XXXX             38,965     100%: two and a half  years     38,965          
6.   Lin Song   XXXX             12,177     100%: two and a half  years     12,177          
              Total(3)       487,060           487,060     108,857   72,572

 

(1) The number of shares have been given effect of the one-for-five reverse stock split of Recon Technology, LTD on December 27, 2019.

 

(2) Can only be unlocked after all of the conditions precedent under Article 5.2 of the supplemental agreement No. 3 have been met.

 

(3) Calculate on $2/share of Recon Technology, LTD, a central parity rate of Renminbi yuan to US dollar officially announced by the People's Bank of China on August 21, 2018 when the agreement was signed, and total shares’ value of RMB 33,295,200.

 

v3.20.1
ORDINARY SHARES
6 Months Ended
Dec. 31, 2019
ORDINARY SHARES  
ORDINARY SHARES

NOTE 20. ORDINARY SHARES

Stock offering

On August 21, 2018, the Company entered into a definitive investment agreement and a supplemental agreement (collectively, the "Agreement") with FGS and the other shareholders of FGS. Following full performance under the Agreement, Recon will own 43% of FGS. As consideration for increasing its affiliates' interest in FGS from 8% to 43%, the Company will (1) pay a total of RMB 10 million in cash to FGS and (2) issue 487,057 restricted ordinary shares of the Company (the "Restricted Shares") to the other shareholders of FGS within 30 days after FGS finalizes recording the Company's corresponding interest at the local governmental agency. If FGS does not reach certain performance goals, the Company has the right to cancel without further payment part or all of the Restricted Shares. The Restricted Shares are also subject to lock-up period requirements that vary for each FGS shareholder, from two and a half years to four and a half years following issuance of the Restricted Shares under the supplemental agreement dated March 17, 2020. FGS has finalized recording Recon's corresponding interest at the local governmental agency, and Recon issued 487,057 Restricted Shares in total to the other shareholders of FGS at a price of $6.4375 per restricted share on September 21, 2018.

On December 10, 2019, the Company's Board approved to effect a one-for-five reverse stock split of its ordinary shares (the "Reverse Stock Split") with the market effective date of December 27, 2019, such that the number of the Company's ordinary shares is decreased from 100,000,000 to 20,000,000 and the par value of each ordinary share is increased from US$0.0185 to US$0.0925. As a result of the Reverse Stock Split, each five pre-split ordinary shares outstanding were automatically combined and converted to one issued and outstanding ordinary share without any action on the part of the shareholder. No fractional ordinary shares were issued to any shareholders in connection with the reverse stock split. Each shareholder was entitled to receive one ordinary share in lieu of the fractional share that would have resulted from the reverse stock split. As of December 26, 2019 (immediately prior to the effective date), there were 23,049,639 ordinary shares outstanding, and the number of ordinary shares outstanding after the Reverse Stock Split is 4,611,720, taking into account of the effect of rounding fractional shares into whole shares. In addition, all options and any other securities of the Company outstanding immediately prior to the Reverse Stock Split (to the extent they don't provide otherwise) will be appropriately adjusted by dividing the number of ordinary shares into which the options and other securities are exercisable by 5 and multiplying the exercise price thereof by 5, as a result of the Reverse Stock Split.

Appropriated Retained Earnings

According to the Memorandum and Articles of Association, the Company is required to transfer a certain portion of its net profit, as determined under PRC accounting regulations, from current net income to the statutory reserve fund. In accordance with the PRC Company Law, companies are required to transfer 10% of their profit after tax, as determined in accordance with PRC accounting standards and regulations, to the statutory reserves until such reserves reach 50% of the registered capital or paid-in capital of the companies. As of June 30, 2019, and December 31, 2019, the balance of total statutory reserves was ¥4,148,929 and ¥4,509,040  ($647,107), respectively.

v3.20.1
TAXES PAYABLE
6 Months Ended
Dec. 31, 2019
TAXES PAYABLE  
TAXES PAYABLE

NOTE 16. TAXES PAYABLE

Taxes payable consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31,

    

December 31,

 

 

2019

 

2019

 

2019

 

 

RMB

 

RMB

 

U.S. Dollars

VAT payable

 

¥

1,732,736

 

¥

1,947,453

 

$

279,486

Income tax payable

 

 

440,031

 

 

758,831

 

 

108,902

Other taxes payable

 

 

8,080

 

 

125,418

 

 

17,999

Total taxes payable

 

¥

2,180,847

 

¥

2,831,702

 

$

406,387

 

v3.20.1
SHORT-TERM BORROWINGS - Additional Information (Details)
6 Months Ended
Dec. 31, 2019
USD ($)
Dec. 31, 2019
CNY (¥)
Dec. 31, 2018
CNY (¥)
Dec. 31, 2019
CNY (¥)
Jun. 30, 2019
CNY (¥)
Short-term Debt [Line Items]          
Interest expense due to third party   ¥ 0 ¥ 31,507    
Remaining balance outstanding $ 1,712,301     ¥ 11,931,310 ¥ 9,010,525
Short Term Borrowings [Member]          
Short-term Debt [Line Items]          
Interest expense due to related party 37,242 259,502 ¥ 257,145    
Founder and Founder's family Member [Member]          
Short-term Debt [Line Items]          
Face amount of debt 1,164,610     8,115,000  
Repayments of debt 745,552 ¥ 5,195,000      
Remaining balance outstanding $ 419,058     ¥ 2,920,000  
Minimum | Founder and Founder's family Member [Member]          
Short-term Debt [Line Items]          
Term of debt 6 months 6 months      
Maximum | Founder and Founder's family Member [Member]          
Short-term Debt [Line Items]          
Term of debt 1 year 1 year